Charter Hammered After Downgrade


Charter Communications Inc. took another beating last week, following a major downgrade of its debt and speculation that the MSO might be heading toward a prepackaged bankruptcy.

Shares in the St. Louis-based company dropped as low as $1.20 apiece on Jan. 15 (down 18.9 percent) after a four-notch debt-rating downgrade by Moody's Investors Service.

The stock later regained some ground, finishing at $1.29, down 19 cents.

Adding to the bad news was a published report that Charter hired investment bank Lazard Frères & Co. LLC to restructure its $18 billion in debt.

That could be the first step toward a prepackaged bankruptcy filing.

Nothing 'imminent'

In a report, UBS Warburg cable analyst Aryeh Bourkoff said he expects Charter to pursue a capital restructuring, absent a near-term trigger to force a bankruptcy filing.

"While the company's predicament is highly speculative as the continued fundamental weakness has exacerbated the risks of the capital structure, we continue to believe that a restructuring is more likely to occur in mid-2003, contrary to press speculation that such an event could be imminent," Bourkoff wrote.

Charter spokesman Dave Andersen said Charter would not comment on rumor and speculation regarding the Lazard hiring. "When we have a restructuring plan, we'll bring it to the market. It's not something that we're ignoring."

Moody's lowered its rating on the senior unsecured notes of Charter Communications Holdings LLC, a subsidiary that issued most of the company's $10.5 billion in high-yield bonds, to Ca from B3 on Wednesday. The parent company's senior unsecured issuers rating was cut to Ca from Caa2.

Moody's said the 6.7 million-subscriber MSO was in danger of defaulting on some loan commitments.

"Moody's believes that rapidly growing loan amortization payments and debt maturities scheduled for year-end 2003 and 2005 will be very difficult to meet without some form of restructuring and/or capital injection," Moody's wrote in its report.

Moody's said Charter's future cash flows can only support about $14 billion to $15 billion in debt.

Charter still 'committed'

"In the end, Moody's has got to do what they have to do, based on their own independent analysis," Andersen said regarding the downgrade. "Our practice is always to maintain open dialogue, to keep them apprised of our plans to maintain and enhance our operating practices and balance sheet. For our part, Charter remains committed to this business, and will continue to do all we can to shore up the balance sheet."

Charter has been under intense pressure to pare debt — estimated by some analysts as about 9 times 2003 cash flow — as it struggles through subscriber losses, declining cash flows and a federal investigation into accounting practices.

Charter lost about 277,000 subscribers in the first nine months of 2002. Fourth-quarter figures haven't been released yet.

In November, Charter said it would re-audit its books for 2001 and 2000. Last month, the MSO said revenue growth in the fourth quarter of 2002 would be on the low end of previous guidance of 8 percent to 9 percent.

Charter also said cash-flow growth for the period will come in under previous guidance. Charter had earlier stated it expected fourth-quarter cash flow to rise 4 percent to 5 percent.

Last month Charter announced a massive management restructuring, splitting its operations into five separate regions. It also stated it would make significant layoffs, but declined to elaborate. Most industry observers expect those layoffs to involve between 1,000 and 1,500 employees.

Charter also fired two top executives in December — chief financial officer Kent Kalkwarf and chief operating officer David Barford — for reasons partly related to the federal investigation. Barford had been on paid leave since October.