September 30 could be a big day in the annals of Charter Communications. That is the day when U.S. Bankruptcy Court Judge James Peck is expected to rule on whether the MSOs reorganization plan will pass muster.
Charter filed for Chapter 11 bankruptcy protection on March 27 and had expected a smooth path toward approval. Its reorganization plan will essentially put control of the company in the hands of its bondholders - mainly Apollo Asset Management, Oak Tree Capital Partners, Crestview Asset Management, Fidelity and Franklin Resources - reduce its overall debt by $8 billion and pump an additional $3 billion in new equity into the company.
But so far the path has been anything but smooth - Charter's lenders have fought tooth and nail to reject the plan, which they say constitutes a change of control and would therefore give them the right to redo their lending agreements - preferably at higher interest rates. A handful of shareholders have filed lawsuits trying to block the reorganization, which they claim is unnecessary. Even Judge Peck has gotten into the fracas, publicly questioning chairman Paul Allen's role in the reorganization.
According to one report Peck asked one witness who was being questioned whether it was "somewhat unseemly" that a man of Allen's wealth (he is worth an estimated $10.5 billion, according to Forbes magazine) should collect money in the bankruptcy.
The dispute with the banks has caused the most friction and appears to be the main obstacle to Charter's emergence from bankruptcy protection. Without the ability to reinstate the debt - at the same interest rate it has paid in the past - Charter said that its reorganization would be impossible.
The reorganization would reduce Charter's overall debt load to about $13 billion from its current $21 billion level. And with a large chunk of its debt converted to equity, Charter expects to pay down that debt even further with the free cash flow it will generate. According to the plan, Charter expects its long-term debt to shrink to $11.3 billion in 2013.
"It's pretty clear to us that if the debt does not get reinstated it will be much more costly for the company to step up the bank debt to market interest rates and would put the whole restructuring plan into a much more questionable position," said Moody's Investor Service senior vice president Russell Solomon.
According to the reorganization plan, Allen, who currently controls 91% of Charter's voting shares, would have that stake reduced to 35% if the plan is approved. Allen would also receive $175 million in cash, $85 million in Charter debt, $20 million in reimbursement for restructuring fees and would avoid having to pay about $1 billion in taxes. Allen, who has reportedly invested about $8 billion of his own money in Charter over the years, would see his current equity position in the company wiped out.
Allen will have the largest individual voting stake in the reconstituted Charter - many of Charter's debt covenants stipulate that Allen must maintain a minimum 35% voting interest in the company. But because a handful of bondholders would end up with a combined greater voting stake in the company, the banks have argued that the deal is essentially a change in control. If that is the case, then the banks can renegotiate their lending agreements - totaling about $12 billion - at higher interest rates that, according to sources, the bondholders find unacceptable.
Charter and the bondholders have argued that Allen's continued participation in the company and his 35% voting interest mean that he remains in control of the company, although to a lesser extent than before.
It is also critical for Allen to remain in control of the company for Charter to continue to benefit from its massive net operating loss carryforwards - essentially accumulated losses that can be used in the future to offset tax payments. Charter has said in its bankruptcy court filings those NOLs total $2.85 billion, which would result in an actual tax savings of $1.14 billion to the company, according to court documents.
"Mr. Allen is the only individual in existence whose continued participation as a [Charter Communications] stockholder enables the debtors to reinstate the senior debt," according to court documents filed by the cable company.
Charter's reorganization plan estimates that its leverage ratio will fall from about 5.5 times in 2009 to 3.5 times by 2013 if the plan is approved.
2009 2010 2011 2012 2013
Revenue $6,919 $7,362 $7,830 $8,331 $8,808
Adj. EBITDA $2,457 $2,639 $2,849 $3,067 $3,270
Net income (loss) ($121) ($57) $158 $446 $769
Long-term debt $13,460 $13,390 $13,320 $12,150 $11,280
Leverage ratio 5.47x 5.07x 4.68x 3.96x 3.45x
Source: Charter reorganization plan and Multichannel News research.