Charter on borrowed time?

For months, cable and Wall Street executives have figured that Paul Allen would bail out Charter Communications by putting more of his billions of dollars to work and keep it from following the lead of Adelphia Communications.

Now, however, they're increasingly worried that Allen is instead coping with Charter's huge debt the old-fashioned way: by taking the company into Chapter 11 bankruptcy protection.

It's not just Charter's deteriorating operations (or the grand jury investigation into its financial reports or the "paid leave" of COO David Barford). What's striking immediate anxiety is Charter's earnings disclosure that it is unexpectedly drawing down its credit lines. The company disclosed that it borrowed $500 million during the third quarter.

That in itself is not unusual in the cash-hungry cable business. What's worrying investors is that Charter doesn't have any immediate use for all that cash.

The behavior is distressingly similar to that of a company preparing for a fight with creditors.

Morgan Stanley media analyst Richard Bilotti last week warned investors that he expects a "forced restructuring" of Charter's debt. "Generally," he said, "if you see a company pull down $500 million in bank debt, four or five quarters' worth, you're putting cash on your balance sheet ahead of stopping paying your debt."

Certainly, companies can restructure their debt without going to bankruptcy court.

But some Wall Street executives fear a "prepackaged bankruptcy" filing. Instead of seeking shelter at its most desperate hour—as Adelphia did—a company negotiates deals with banks and bondholders before
heading for bankruptcy court, paying 10 to 80 cents on the dollar plus some equity in a restructured company. Allen might put money in at that point. Once the company is in Chapter 11, a judge absolves its debt and lets it reemerge. But old stockholders are pretty much wiped out.

Charter wouldn't comment, but company executives tell analysts that the board directed the $500 million draw in August, looking to have enough cash on hand to cover interest and capital spending through the end of 2003.

UBS Warburg cable analyst Aryeh Bourkoff said Charter executives may merely be worried about lenders' drying up over the next year and want to ensure Charter's liquidity. But he acknowledged that "this has definitely has been construed in the market as a signal of desperation."

In the past, Charter executives have noted that they face no debt maturities until 2005. But Bilotti believes that the company won't be in strong enough shape to refinance debt then, even if the economy rebounds.

And there are other trigger events. All eyes are on Charter's 10-Q filing due next week. Failing to file would violate some of Charter's bank agreements, and the company is currently wrestling with its new auditors over treatment of deferred tax liabilities. Also, payments exceeding $25 million as a result of shareholder suits could violate bank agreements.