Moody’s Investors Service lowered its probability-of-default rating on Charter Communications to Ca from Caa2 Friday, meaning that it believes the chances of default are more likely and that the St. Louis-based MSO could be headed for bankruptcy court next year.
Moody’s rating change was prompted by Charter’s announcement Friday that it has asked its financial adviser Lazard LLC to initiate discussions with its bondholders regarding a possible restructuring of its debt.
In an interview, Moody’s senior vice president Russell Solomon said that while he doesn’t think Charter will be forced into bankruptcy court immediately, he believes the company may be trying to assemble debtors to agree upon a pre-packaged filing. A pre-packaged Chapter 11 bankruptcy—similar to what overbuilder RCN and U.K. cabler NTL have done in the past—enables a company to operate as usual, while making it easier to exchange debt for equity.
“I think that is essentially what they are striving for,” Solomon said of a pre-packaged Chapter 11.
Solomon said that while he believes the company is performing reasonably well, it’s just hampered by its debt structure. Charter has said it has sufficient funding for operations well into 2010.
In the past, Charter has avoided big debt payments by renegotiating its obligations at higher interest rates and pushing out maturities. But the Moody’s analyst believes that the company may have reached the end of the line.
“The numbers have become sufficiently large,” Solomon said. “I think the announcement is indicative that they recognize it’s a fait accompli and it’s probably in everybody’s best interest to have something happen sooner rather than later.”
Charter would not comment on bankruptcy speculation.
“As Moody’s stated in its press release, it took this action in response to Charter’s announcement that it is initiating discussions with its bondholders,” Charter said. “This is typical in situations like this. Charter’s objective with these discussions is to improve the company’s balance sheet and enhance its financial flexibility that will better position Charter for the future and is in the best interest of the company and its customers.”
Charter stock, down about 88% so far this year, closed at 13 cents per share on Friday, down 2 cents each.