A New Chapter For Charter

Nearly eight months after filing for Chapter 11 bankruptcy protection, Charter Communications has received approval of its reorganization plan, paving the way for a recapitalization of the company and a new stock.

U.S. Bankruptcy Court Judge Robert Peck formally issued his decision — which he had read aloud in open court last month — on Nov. 17. With the document in hand, Charter can now move forward with its plans to reorganize.

In a statement, St. Louis-based Charter said it could issue a new stock on the NASDAQ system — its current shares would be worthless — not less than 45 days after emerging. That would likely mean that a new Charter stock wouldn't hit the market until early next year.

Charter CEO Neil Smit said in an interview that while the company is moving ahead with its emergence from bankruptcy, it expected an appeal to the plan.

On Nov. 20, that is exactly what happened as a group of lenders led by J.P. Morgan, shareholder R2 Investment and Law Debenture Trust Co. of New York (a trustee for holders of $479 million in Charter bonds) filed documents to appeal the plan's approval.

But that shouldn't delay Charter's emergence. Pending an official stay from the court, Charter can continue the process and expects to emerge from bankruptcy in the next few weeks.

The banks had claimed that restructuring was a change of control that would allow them to redo their loan agreements with the company, delaying the process for weeks as testimony was heard. In his decision, Judge Peck admitted that the process was difficult.

“These are perhaps the largest and most complex prearranged bankruptcies ever attempted, and in all likelihood rank among the most ambitious and contentious as well,” Peck wrote. “Given the state of the capital markets, the restructuring proposed here by Charter represents an extraordinary achievement.”

Charter filed for Chapter 11 bankruptcy protection on March 27 and filed a reorganization plan that would shave about $8 billion in debt from its books and pump another $3 billion in equity into the company.

The reorganization would reduce Charter's overall debt load to about $13 billion from its current $21 billion level. And with a large chunk of its debt converted to equity, Charter, with 5 million basic video customers, expects to pay down that debt even further with the free cash flow it will generate. According to the plan, Charter expects its long-term debt to shrink to $11.3 billion in 2013.

The deal was preapproved by Charter's largest bondholders — mainly Apollo Asset Management, Oak Tree Capital Partners, Crestview Asset Management, Fidelity and Franklin Resources — who have agreed to swap most of their debt for equity in a new Charter entity. Chairman Paul Allen, who holds 91% of the MSO's voting shares, would see his position dwindle to 35% voting control. Allen will remain the single largest individual holder of voting shares in the new company.

Through it all, Charter has managed to maintain its health operationally — it has stayed on pace with MSO peers, reporting 4% revenue growth and 7.8% cash-flow growth in the third quarter.

“We stayed focused on the business, and I think a lot of credit goes to the employees that kept their minds on delivering value,” Smit said.

“The primary benefit that the restructuring offers us is more financial flexibility; we're not as dependent on the capital markets as we have been in the past,” Smit said, noting that the plan has eliminated significant debt maturities through 2013.

And free-cash-flow growth — which was particularly strong during the bankruptcy process because Charter did not have to make interest payments — is expected to continue.

“That was one of the objectives of our restructuring plan, to come out free-cash-flow positive on emergence,” Smit said. “That was an important objective for us and thanks to the support and alignment of our board and the bondholder committee we worked with, we believe that will be achieved.”