Cable Operators

Charter Inches Toward '11’

1/17/2009 1:30 PM Eastern

Charter Communications continued to fuel speculation that the fifth-largest MSO in the country is headed for bankruptcy court, making several moves in recent days that could pave the way for a major restructuring.

Charter — which is the most highly leveraged publicly traded cable company, with about $21 billion in debt — said last month it was negotiating with its bondholders about possibly restructuring its debt.

Last Wednesday, the St. Louis-based MSO said that it had eliminated its executive cash-award plan — issuing awards to top executives who would have vested in the plan this year — and instituted a restructuring value plan, which would tie bonuses to increases in the company enterprise value.

On Jan. 15, Charter said that two of its subsidiaries had purposely missed a $73.7 million interest payment on about $1.2 billion in bond debt, an indication that it could be making progress in those negotiations.

In a statement, Charter CEO Neil Smit said that the MSO continues its negotiations with bondholders.

“We are engaged in discussions with our bondholders aimed at improving the company’s capital structure,” Smit said in the statement. “We’ve made significant progress over the last several years with regard to operational improvements and we hope to make similar progress with regard to our capital structure.

Moody’s Investors Service said back in December that Charter could be headed for a pre-packaged bankruptcy, which would allow the company to swap at least some of its debt for equity and emerge with a healthier balance sheet. Charter has shown strong operational progress lately — operating cash flow has risen by 10% or more in each of the past eight quarters — but its crushing debt load has been dragging on the stock. Charter shares plunged 93% in 2008 from $1.17 to 8 cents per share. The stock was trading at 12 cents on Jan. 15.

A pre-packaged bankruptcy could take several forms, but essentially it would allow Charter to swap a large part of its debt for new equity in the company. It is likely that chairman and largest shareholder Paul Allen would seek to keep his controlling interest, but he may be willing to give up some of his stake. Allen currently owns 52% of Charter’s equity and 91% of its voting power.

Moody’s senior vice president Russell Solomon said he believes Charter could file for bankruptcy protection as early as this month. He pointed to the company’s decision not to make the $73.7 million interest payment as an example. Those bond deals give Charter a 30-day grace period to make the interest payment before the full $1.2 billion comes due.

“The clock is ticking,” Solomon said.

Charter wouldn’t be the first cable company to file for a pre-packaged bankruptcy. In May 2004, overbuilder RCN filed a pre-packaged Chapter 11 and emerged about six months later with a healthier balance sheet and a stronger stock. And in 2002 NTL (now Virgin Media) filed a pre-packaged Chapter 11 that erased about $11 billion in debt.

While Charter is understandably not yet showing all of its cards, all of the recent signs point to some kind of restructuring.

“Changing the various financial incentives for senior executives clearly looks like they are trying to retain them, but also trying to incent them to increase enterprise value,” said Miller Tabak media analyst David Joyce. “All of these little changes going on behind the scenes just add up to them filing some sort of pre-packaged bankruptcy or restructuring of some sort.”

Joyce added that while Charter’s heavy debt has been an issue for years — it is the most highly leveraged cable operator in the country — a restructuring isn’t an absolute necessity. Joyce said that Charter’s next big maturity is a $1.9 billion payment due in September 2010. The analyst estimated that Charter has enough cash and credit lines to fund it through at least the fourth quarter of 2010.

“These nervous credit markets are looking at a maturity that is still 18 months away,” Joyce said.

Solomon agreed that Charter has enough cash to get it through the next 12 to 15 months, but added that the company’s past plan of refinancing debt at higher interest rates and pushing out maturities is beginning to hit a wall.

“For years they have been able to keep it together with Band-Aids,” Solomon said. “The numbers are just getting bigger.”

Opening a new chapter
Cable companies that have filed pre-packaged Chapter 11 bankruptcies in an effort to restructure their debt:
SOURCE: Multichannel News research
RCN: The Herndon, Va.-based overbuilder filed its pre-packaged Chapter 11 in May 2004 and emerged from bankruptcy in December of that year with a much lighter debt load — it converted $1.2 billion in unsecured debt into new equity and eliminated about $1.8 billion in preferred share obligations.
NTL: Now called Virgin Media, NTL filed its pre-packaged Chapter 11 in 2002, eliminating about $11 billion in debt for the U.K cabler.
Knology: The West Point, Ga.-based overbuilder filed its bankruptcy petition in September 2002, emerging about one month later with a stronger balance sheet and lower debt. About a year later in 2003 the overbuilder filed for an initial public offering, raising about $56 million in the deal.
September