Charter Could Emerge From Bankruptcy By Summer's End

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Charter Communications filed its long-awaited Chapter 11 bankruptcy petition in U.S. Bankruptcy Court for the Southern District of New York on Friday, a move that will shave about $8 billion in debt from the troubled MSO's balance sheet and pump $3 billion in new cash into its coffers.

Charter had announced on Feb. 12 that it had reached agreement with certain bondholders to swap their debt for equity.

According to Charter, the prepackaged deal will include a $3 billion investment by the bondholders committee, including up to $2 billion in equity, $1.2 billion in rollover debt and $267 million in new debt to support the overall refinancing of the company.

After the dust clears --  which could be by the end of the summer -- Charter's debt will be reduced to about $13.5 billion, most of that through banks.

The agreement will also push out most maturities to 2013 and 2014 -- although some small debt amounts will be due in 2012 -- allowing Charter management to remain focused on running the company and not constantly keeping one eye trained on debt refinancing windows.

According to people familiar with the filing, the biggest chunk of debt -- about $7.5 billion -- would come due in 2014. But those people added that by that time Charter is expected to be a significant generator of free cash flow -- it should have more than $2 billion in cash on hand in 2014 -- which should allow it to satisfy any obligations.

"The expectation that in five years, on a deleveraged basis, the company would be able to refinance," the person said. "Obviously, you never generate enough cash to pay off all of your debt in full as they mature. Debt capacity and sizing was done so that all your leverage and credit statistics should be able to be refinanced if there is any kind of functioning market in the 2013-2014 time frame."

Just who will emerge as the largest equity holders of the new company has not yet been determined, but according to one executive close to the matter, the largest stake held by an individual bondholder would be about 20% of the company.

Charter biggest bondholders include Apollo Management, Crestview Partners, Oaktree Capital and Franklin Resources. According to people familiar with the process, each of those bondholders will receive both common stock and voting shares in a newly capitalized Charter, but neither will possess more voting shares than Charter chairman Paul Allen.

Allen, who had previously owned 52% of Charter's equity and 91% of its voting shares, will end up with a 4% equity stake and 35% of the vote in the new company.

According to people familiar with the bankruptcy filing, the next step will be to file its disclosure statement, which will detail its reorganization plan. Those same people believe that once the disclosure statement is filed, Charter could emerge from bankruptcy by the end of the summer. That deadline should be made fairly easily, given that the majority of bondholders have already signed off on the deal.

According to the bankruptcy filings, Charter does expects its banks to object to one portion of the reorganization -- the reinstatement of the bank debt -- but that shouldn't raise big concerns.

According to the filings, a key part of the reorganization is the reinstatement of about $11.8 billion in bank debt, essentially transferring the bank obligations from the old Charter to the new company at precisely the same terms.

Still, the nation's fourth-largest cable operator said in the filings that it expects the bank to try to block the reinstatement to get more favorable lending terms, i.e., a higher interest rate.

While Charter said in the filing it expects reinstatement to "be a significant and disputed issue at plan confirmation," it also noted that it has not defaulted on any of the loan agreements and will continue to repay the loans as they come due.

"A filing under Chapter 11 is not supposed to create a windfall opportunity for the benefit of senior creditors seeking to renegotiate the terms of debt financing they have already extended," Charter said in the filing.

Charter stock, which had been trading in the 2 cents to 4 cents per share range since it announced plans to file for bankruptcy protection on Feb. 12, will likely be retired shortly after the MSO emerges from Chapter 11. In its place: a new Charter equity that will be valued closer to its cable peers.

While the bankruptcy filing adds a blemish to the already struggling company, it will significantly ease its debt load - at $21 billion, Charter was leveraged at 9 times 2008 cash flow, tops among publicly traded MSOs.

Even assuming that cash follow will not rise at Charter for this year the restructuring will allow Charter would drop its leverage to a more manageable 5.7 times 2008 cash flow.

Additionally, Charter's cash flow was barely enough to cover its interest payments -- its interest coverage in 2008 was 1.2 times. The new deal will reduce annual interest payments by about $830 million, improving its interest coverage to about 2.1 times, in line with the rest of the industry.

Relieving some of that pressure should allow management to focus more on operations and not worrying about how to refinance its debt.

Charter management, led by CEO Neil Smit, chief operating officer Mike Lovett and chief financial officer Eloise Schmitz, is expected to remain intact.

Operationally, Charter has performed in line with its peers and is expected to continue that trend. In 2008 Charter's revenue rose 8.5% to $ 6.5 billion and cash flow increased 10.3% to $2.3 billion. The company lost 75,700 basic customers - in keeping with the declines in the rest of the industry - in the fourth quarter and grew digital subscribers by 22,300, high-speed Internet subscribers by 22,900 and phone subscribers by 75,200.

UBS Securities and Houlihan Lokey Howard & Zukin Capital advised the creditors in the deal.

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