After months of speculation, Charter Communications said Thursday that it has reached a deal in principle with certain debtholders in a restructuring that will reduce its debt by $8 billion and result in the St. Louis-based MSO filing a Chapter 11 bankruptcy petition.
Analysts have been waiting on a Chapter 11 filing for months -- Moody's Investors Service senior vice president Russell Solomon was the first to raise the issue in December.
A pre-packaged bankruptcy such as Charter appears to be proposing -- one where the major debtholders have already reached agreement -- is fairly common and would allow the MSO to emerge rather quickly with a healthier balance sheet.
Past operators 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. In 2002, NTL, now Virgin Media, filed a pre-packaged Chapter 11 that erased about $11 billion in debt.
In an interview Thursday, 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 today's announcement, Charter said it would now make that interest payment.
Charter has been saddled with a huge debt burden practically from its beginnings in 1998, when Microsoft co-founder Paul Allen purchased the company, combining it with his existing cable assets. What followed was a major acquisitions spree that 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 about 10 times cash flow.
With this new deal, Charter will have lowered its debt to about $13.5 billion, and its leverage ratio to between 7 and 8 times cash flow.
The deal appears complicated but essentially boils down to this: Charter will file for Chapter 11 bankruptcy protection by April 1, and 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 for the restructuring,
Left in the lurch: 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."
Investors apparently got the message - Charter stock was down 64% (4 cents each) to 3 cents per share in afternoon trading.
Allen, who serves as the operator's chairman and owns about 51% of Charter's equity and 93% 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.
"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.
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