New Chapter for Charter


The bankruptcy watch for Charter Communications came to a close last week.

After months of speculation that it was close to reaching a pre-packaged Chapter 11 agreement with its major bondholders, the St. Louis-based company said Feb. 12 that it had done just that — crafting a restructuring agreement that will reduce its crushing debt load by $8 billion. As a result, Charter said it would file a Chapter 11 petition by April 1.

The news came as little surprise to analysts who have been awaiting a bankruptcy filing for months. In December, Moody's Investors Service senior vice president Russell Solomon was the first to raise the issue.

A prepackaged bankruptcy such as what Charter appears to be proposing — one in which the major creditors have already reached agreement — is fairly common and would allow the MSO to emerge rather quickly with a healthier balance sheet. Past cable companies that have made similar filings include overbuilder RCN, which filed a pre-packaged Chapter 11 in May 2004, and emerged about six months later with a healthier balance sheet and a stronger stock. And in 2002, United Kingdom operator NTL (now Virgin Media) filed a pre-packaged Chapter 11 that erased about $11 billion in debt.

In a Feb. 12 interview, Solomon said that the restructuring appears to be just what Charter needed.

“This gives them another running head start,” Solomon said.

Charter said in December that it had asked its financial adviser Lazard LLC to initiate discussions with its bondholders regarding a possible restructuring. Speculation surrounding a possible Chapter 11 filing heated up after the MSO said in January that it would not make a $74 million interest payment on some of its debt. As part of last Thursday's announcement, Charter said it would now make that interest payment.

Charter has been saddled with a huge debt burden practically from its beginning in 1998, when Microsoft co-founder Paul Allen purchased the company and combined it with his existing cable assets. What followed was a major acquisitions spree which boosted Charter's footprint but burdened the company with a huge debt load.

Charter has historically been the most-leveraged publicly traded cable operator, with about $21.5 billion in debt as of Sept. 30. That put the company's leverage ratio at nearly 9 times cash flow. With this new deal, Charter will have lowered its debt to about $13.5 billion, and its leverage ratio to between 5 and 6 times cash flow.

The deal appears complicated but essentially boils down to this: Charter will file for Chapter 11 bankruptcy protection by April and will give creditors the option of accepting new shares in a recapitalized company, warrants to purchase shares in the new company, or exchange their interests for new debt. Charter will also raise $3 billion in cash.

Left in the lurch will be holders of Charter's common stock. According to the statement holders of Charter's common shares “will not receive any amounts on account of their common stock, which will be cancelled.”

Allen, who owns about 52% of Charter's equity and 91% of its voting stock will continue to be an investor in the company and will retain the largest voting stake in the company, the statement added.

But it is likely that Allen will have to loosen his grip on the company.

According to executives familiar with the restructuring, some Charter creditors will swap their debt for new Charter equity. And as a result, at least some bondholders will emerge with equity stakes that should rival Allen. Currently, the closest equity holder to Allen is FMR Corp., parent of the Fidelity mutual funds, which owned 12.95% of Charter's equity as of March 17.

“There will be some other big holders,” said one executive familiar with the restructuring. “Some bondholders have been in the Charter name for some time and own a lot of Charter debt. Since they're converting $8 billion of debt into shares, a couple of those guys are going to be big equity holders.”

The executive wouldn't identify who those bondholders could be, but added the company is likely to file an 8-K statement with the Securities and Exchange Commission soon which would provide more details.

And though Allen will continue to dominate the voting stock, his control will no longer be in the 90% range, the executive said.

The executive also believes that once charter files for Chapter 11 protection, it would take between 90 and 120 days to emerge, mainly because a group of core creditors have already signed off on the deal.

“We are pleased to have reached an agreement with such a significant portion of our bondholders on a long-term solution to improve our capital structure” Charter CEO Neil Smit said in a statement. “We are committed to continuing to provide our 5.5 million customers with quality cable, Internet and phone service, and through this agreement, we will be even better positioned to deliver the products and services our customers demand now and in the future. Moreover, the interest and support provided by our stakeholders with their new capital investment underscores their confidence in Charter and our business.”

The business appears to be doing well. In a separate press release, Charter released preliminary fourth quarter results, adding that it expects revenue in the period to rise 7% to $1.7 billion and cash flow to increase 10% to $619 million.

UBS; Paul, Weiss, Rifkind, Wharton & Garrison LLP; and Houlihan, Lokey, Howard & Zukin served as advisers to Charter's creditors in the deal.