Charter Deal Wins Praise

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Charter Communications Inc. completed two financing deals April 26, including a $6.5 billion bank refinancing that represented the largest institutional loan ever made — a sign that the investment community is looking favorably on the changes the cable company has made over the past two years.

St. Louis-based Charter still has a long way to go. Its $19 billion in debt makes it the most highly leveraged cable operator in the country.

But representatives of the investment bank that did the deal — including a $1.5 billion high-yield bond deal — said Charter has made major strides.

And practically every major firm that participates in the syndicated loan market wanted in on the April business.

THE BANKS

Ultimately, Charter chose JP Morgan Chase as book-runner on the loan agreement, with Bank of America, Credit Suisse First Boston and Citigroup participating.

On the bond deal, JP Morgan led the group, which included Bank of America, CS First Boston and Citigroup. It extended an existing $5.1 billion bank credit facility and gave Charter additional borrowing capacity.

It was split into three parts: a $1.5 billion revolving loan and two term loans — a six-year, $2 billion loan and a seven-year, $3 billion loan.

The $3 billion tranche was the largest institutional term loan ever made, according to JP Morgan.

“It was probably the most hotly competed-for piece of business on the street this year,” JP Morgan managing director and head of North American loan sales Andy O’Brien said.

“They had $9 billion of credit facilities that were starting to hit the amortization wall,” O’Brien said. “That was a deal that was probably outsized for today’s loan market. It had four different borrowers.

“We believed Charter could achieve an opportunistic refinancing by taking it to the bank and bond market with the right structure. It was not a view that was shared by everybody. But as we started getting out there and talking to people, it became a very contested piece of business.”

On the bank side Morgan consolidated loans of three different Charter subsidiaries — CC VI Operating Company LLC, Falcon Cable Communications LLC and CC VIII Operating LLC — into Charter Communications Operating LLC.

On the high-yield side, Charter issued the bonds through its subsidiary Charter Communications Operating LLC, which meant the bonds had a higher risk rating than if they were issued through the parent company.

Still, investors were a little nervous, at least initially. Charter already has a tremendous amount of commercial paper on the market, and potential participants at first looked askance at another debt issue.

“There was absolute trepidation. The people were capacity-constrained in name, there’s no question about that,” JP Morgan manager of high-yield capital markets Jim Casey said.

DIFFERENT STRUCTURE

“The way to get around that was to structure something absolutely different so that it could be added to different institutions that already owned the name. There is nothing else like this security that exists at Charter and we wanted to make sure we differentiated the important terms of the security in order to get people to buy it.”

Participation ended up being robust. JP Morgan said about 100 accounts participated in the loan deal and 170 took part in the bond transaction.

“You can count on two hands the traditional high-yield investors that did not buy this deal, which in a capacity constrained environment is remarkable,” Casey said.

O’Brien credited Charter’s having restructured at least a portion of its debt over the past year helped a lot. Since January 2002, Charter had refinanced about $3.1 billion in debt at better terms.

O’Brien gave most of the credit for getting those transactions done to Charter CEO Carl Vogel.

AID TO EQUITY?

O’Brien added that the latest move won’t solve Charter’s equity problem, but it could help in attracting a higher price for that equity once the company decides to issue it.

“His [Vogel’s] last balance-sheet maneuver was to eliminate $8 billion of near-term amortization and obviously this transaction completes that,” O’Brien said.

“It doesn’t solve the re-equitization that’s required in the company. But it certainly puts him in a position when you’re negotiating the price of that equity, he’s in a better position because he no longer has a gun to his head.”

Casey agreed about Vogel’s impact. “I think the market recognizes that he has done well, which is one of the reasons why they were willing to buy $8 billion of single-B paper. If they didn’t think Carl Vogel was doing the right things at the right time, they wouldn’t be supporting him with their money.”

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