Charter Tweaks Its Structure


Charter Communications Inc. said it reached an agreement with its lenders that would result in the formation of a new holding company within the St. Louis-based MSO's corporate structure, allowing it to accept a $300 million loan from its chairman — and possibly serving as a vehicle to exchange bond debt.

In a terse press release, Charter said it would create intermediate holding companies between Charter Communications Holdings LLC and Charter Communications Operating LLC, which contains about $5.2 billion in senior secured debt.

Charter would also contribute equity from its other holding companies — CC VI, CC VII and CC VIII — to those new holding companies. How much equity it would contribute has not yet been determined.

According to sources in the financial community, the new holding companies are being created to serve as a vehicle for a $300 million loan that Vulcan Inc. — the investment vehicle of Charter chairman Paul Allen — said it would issue to the cable operator in February. Those funds are to be used to ensure the MSO remains in compliance with its financial covenants.

While that money doesn't have to be drawn down, Charter had to amend its bank agreements in order to accept the loan.

"The money is not being drawn on," said the source in the financial community. "The money is there almost as if it was a letter of credit, which is if you need it, it's there; if you don't need it, you don't use it. Nonetheless, you have to treat it like you're going to use it."

One other possible purpose of the new structure is to serve as a vehicle for a debt exchange, such as issuing new bonds to holders of its $1.38 billion in convertible notes. Those new bonds would likely carry a lower face value, but could be attractive to note holders, because the debt in the new holding company would be senior to the notes they currently hold.

The debt exchange has not been determined. It could also be difficult to do, because Charter's bonds are trading at nearly 80 cents on the dollar (up from about 30 cents on the dollar earlier this year).

With the bonds trading near par, investors may not see a debt exchange as worth their while.

According to a source in the financial community, issuing new bonds through the new holding company is a long shot.

"If they turn around and say, 'Let me issue debt out of this box and use that debt — which is super-senior to everyone else — to take out the converts,' do you think that is going to make the $10 billion of senior unsecured public bondholders very happy? Probably not," said the financial source.

"They probably can do it; there is nothing the bondholders can do. But even if they can do it, they probably won't."

The deal also does nothing to reduce Charter's debt. The $5.2 billion credit facility will still reside in Charter Communications Operating LLC.

In Charter's complicated corporate structure, bank debt is contained in several different entities.

But it is that heavy debt load — $19 billion — that has been a significant drag on Charter stock.

While Charter's share price declined about 90% in 2002, the stock has been on a tear in the past few months, doubling in price from $1.94 on May 14.

The stock was up 11.5% last Wednesday at 4 p.m. to $3.88 apiece, prior to the announcement.

While debt still remains an issue, Charter has made significant progress in the past several months, reducing its subscriber losses and increasing cash flow. The company also managed to sell one of its nonstrategic systems at a relatively high valuation — about $3,600 per subscriber — last month.

Last year, Charter said it would divest itself of non-core systems with about 600,000 subscribers to help pay down debt.