Charter Exits Bankruptcy, Still Highly Leveraged (CHTRQ)

Charter Communications Inc. (CHTRQ) has just announced that it has completed its financial restructuring and has emerged from Chapter 11 protection.  The problem here is that Charter’s life was a slash and burn for those old stock holders who were effectively wiped out and the new company is less-leveraged yet still very leveraged.  That is almost always the case in bankruptcy protection, but the new holders now have to consider the company’s still-high debt.  They will also have to consider that the company’s largest vote effectively remains the same for what destroyed it in the first place.

The company noted that this “significantly improves the company’s capital structure by reducing debt by approximately 40 percent, or approximately $8 billion.”  This still puts debt servicing at extremely high levels on a remedial look.  The company’s 2008 revenues were just under $6.5 billion, and losses in 2008 were over $2.45 billion.  It also lost more than $1.6 billion in 2007 and lost $1.37 billion in 2006.  A huge portion of these losses were due to debt servicing.  But a 40% reduction in debt won’t cure the situation if Charter goes back to its old days of debt issuance to fund debt maturities and interest payments.  It might not cure it even if it does not revert to its old habits.

Most importantly, Charter’s CEO says it is positioned to generate free cash flow. The proof will be in the pudding.  We had already listed Charter as one of our 2009 picks for companies which won’t survive in their current form.  This is noted as a reduction of more than $830 million in annual interest expenses.  If you use simple math, that does not get Charter anywhere close to positive earnings on a static basis.  Free cash flow may be enough for now, but ultimately these investors are probably going to demand solid earnings.  Cable companies can still get away with using EBITDA and Free Cash Flow multiples, but as the cable markets are maturing and as they start to become more and more like a utility bill it seems a safe bet that raw earnings will have to come into play.

Charter will receive about $1.6 billion via an equity rights offering to support the refinancing and the reduction of about $8 billion of debt.

The Joint Plan of Reorganization was confirmed by the United States Bankruptcy Court for the Southern District of New York on November 17, 2009.  Today’s announcement is the formality.  The big question ahead is if the debt holders feel this will be enough to keep the ship afloat for the long haul.

Also noted was that this restructuring was without losing sight of serving its customers and maintaining its business relationships.   Again, the proof will be in the pudding here.  Customers may not have the same choices of where to go, but suppliers frequently hold post-bankruptcy companies to more stringent terms than in the past.

Current debt in subsidiaries will be reinstated under pre-existing pricing and maturity dates. Charter will also exchange existing CCH II notes for approximately $1.7 billion of new 13.5% CCH II notes due 2016.  Charter plans to re-list on the NASDAQ after 45 days.

This restructuring leaves effectively zero for those old Charter holders.  It specifically states in the release that existing shares of its common stock were canceled. In short, if you are an old holder of common stock you are still wiped out.  Paul Allen will also get to continue as an investor and will also get to retain the largest voting interest in the company, something which the independent bondholders might have screamed bloody murder about.

It is not unusual for companies which emerge from Chapter 11 come out with cleaner books that are not exactly clean to conservative investors.  The notion that Paul Allen still holds the largest voting interest is one of concern.  Sure, he has an incredible past personally.  But at Charter this was a disappointment the entire decade and the only holders who made profits through time were those who sold the shares short.

As noted before, and still noted with less of an emphasis… Charter is “Walking through the valley of the shadow of debt.”

JON C. OGG