RCN Makes Boldholders Wait

1/18/2004 7:00 PM Eastern

Debt-heavy RCN Corp. turned up the heat on bondholders last week, saying it would withhold a $10.3-million interest payment on its 10.125% bonds due 2010, a move the company called a "negotiating tactic" to cajole bondholders into agreeing to a debt-for-equity swap.

Princeton, N.J.-based RCN — relatively small, but operating as a cable, data and phone competitor in such markets as New York City, Boston and Chicago —has been trying to restructure its debt for more than two years.


The company has made some substantial strides. Since 2001, it has reduced its total debt from about $2.7 billion to $1.67 billion as of Sept. 30, 2003.

RCN hopes bondholders will accept a debt-for-equity swap to retire a substantial portion of the debt that remains.

On Jan. 15, RCN issued a statement that it was continuing productive discussions with bondholders and lenders. Although it could not predict exactly what form a restructuring would take, it "anticipates that such an agreement would result in a conversion of a substantial portion of the senior notes into equity and an extremely significant dilution of current equity."

RCN's stock price dropped 20% (30 cents) to $1.15 that day.

RCN said it has enough cash to make the interest payment if it chooses to do so. The company said that it has until Feb. 13 to make the interest payment.

If it fails to make the payment, all of its debt —including $1.1 billion in bond obligations and about $520 million in bank facilities — could come due immediately, because of cross-default provisions in its debt agreements.

RCN currently owes about $203 million on the 10.125% bonds. Issuing stock could technically mean that RCN would have to put more than another 100 million shares on the market. RCN currently has about 111.2 million shares outstanding and a market capitalization of about $127.9 million.

Granted, it's unlikely that RCN would try to settle all of the bond debt at face value, or double its number of outstanding shares.

The 10.125% bonds, according to analysts, currently trade around 50 cents on the dollar.


Some analysts speculate that RCN is setting the stage for a pre-packaged Chapter 11 bankruptcy filing, which would allow the company to operate as usual, while making it easier to exchange debt for equity.

Overbuilder Knology Inc. — which completed an initial public offering of stock in December (see story, page 46) — restructured its debt through a pre-packaged Chapter 11 filing last year. Rural cable operator Galaxy Cablevision filed a pre-packaged Chapter 11 in 2001 and emerged in 2002.

In a Chapter 11, RCN would likely issue new equity, paying off bondholders and lenders with those shares but leaving current shareholders in the lurch.

"Most people are talking about a pre-packaged Chapter 11 filing," said one debt analyst who asked not to be named. "I think they'll have to cram down some of the equity and get rid of the preferred layer — they have a huge $2.4 billion tranche of preferred. The only way to rectify that is to do a pre-packaged bankruptcy, erase some of the common stock and get rid of the preferred equity and convert at least some of the bond claim into equity."


RCN wouldn't go that far, however, adding that any debt-for-equity swap would be a negotiation between the parties.

"We decided to defer the interest payment that normally would have been paid today," said RCN manager of investor and public relations Jim Downing. "It's a negotiating tactic. We just want the constituents to move forward with it so that we can get on with our lives and go back to being a multi-service provider instead of a financing company."

RCN vice president of public relations Barak Bar-Cohen said it was too early to speculate where the negotiations with bondholders would end up.

"It's premature and speculative to give you the final restructuring deal," Bar-Cohen said. "You can think of this decision to defer the bond payment as motivation for the lenders to spend a little more time and a little more diligence considering some of the discussions and offers we are currently working through. We think there are good lines of communication with the bondholders and we are anticipating moving forward quickly to complete a restructuring deal."

In a statement, Russ Belinsky of Chanin Capital Partners, financial advisers to the bondholders' committee, said: "All of our discussions with the company contemplate the conversion of a substantial portion of the bonds into equity. Therefore, this restructuring should positively impact the operating companies and the vendors, customers, and employees of those companies. We look forward to completing our negotiations and our continuing long-term relationship with the company."

Bar-Cohen noted major strides RCN has made in reducing its debt over the past few years.

"We view this as the impetus of the final stage of the restructuring process," Bar-Cohen said.

One debt analyst who has been following RCN since 2002 believes the interest payment deferment is a sign that bankruptcy is not an option RCN is considering at the moment.

"I think they are going to do a restructuring with the bondholders who are on board," said APS Financial senior vice president and debt analyst Brent Brewer. "If they thought they were going to default, they wouldn't have paid the Jan. 1 coupons. By not paying today [the Jan. 15 interest payment] they probably think that by Feb. 13, they can come to some kind of agreement with bondholders."

RCN paid about $7.7 million in interest on 11% senior discount notes on Jan. 2.

While shareholders obviously were upset about the dilution possibilities, Brewer said they would be worse off in a bankruptcy.

"For the shareholders, that [a debt-for-equity swap] is better than wiping them out," Brewer said. "In a bankruptcy, they would probably get zero. At least this way, there is at least some small positive value to their stock."

RCN, once a high flyer in the telecom space, has fallen on hard times, as did other so-called overbuilders when the telecom bubble burst.

RCN does have good assets — its new-build infrastructure also serves Washington, D.C., and San Francisco — but ran into trouble financing construction with public debt.

As the debt mounted, the stock price plunged from a high of about $75 per share.


Microsoft Corp. co-founder and Charter Communications Inc. chairman Paul Allen was one of the biggest investors in RCN, pumping in $1.65 billion in 2000 through Vulcan Inc. for preferred shares convertible into about 23% of RCN's common stock.

On Dec. 31, Allen sold 40% of his RCN holdings (11.4 million shares of common stock and 247,009 shares of preferred stock) for $2 million, a fraction of what he had originally paid.

Vulcan still owns preferred shares convertible into 22.9 million RCN shares, or about 14.9% of its outstanding stock, and is its second-largest shareholder.

RCN hired Merrill Lynch & Co. in October to review financial alternatives and capital structure and to explore possible capital raising opportunities.

Merrill's solution appeared to be selling off non-core assets, which RCN did with great success last year.

RCN sold its Princeton, N.J., cable operations for about $245 million ($3,600 per subscriber) to Patriot Media & Communications Inc. and its Carmel, N.Y., cable system to Susquehanna Communications Inc. for $120 million, or about $4,000 per subscriber — hefty valuations in what was a relatively down market for cable properties.

RCN also has another block of systems in Lehigh Valley, Pa. with about 100,000 subscribers that analysts estimated could be sold for between $350 million and $400 million.

RCN Long-Term Debt
Term Loans $521,250
Source: Company reports figures in thousands
Evergreen Facility25,702
Senior Notes 10% due 2007160,879
Senior Discount Notes 11.125% due 2007315,995
Senior Discount Notes 9.8% due 2008290,289
Senior Discount Notes 11% due 2008139,472
Senior Notes 10.125% due 2010202,871
Capital Leases11,530

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