Analysts Say Charter Must Sell Assets, Extend Debt to Avoid Bankruptcy
Charter, the most indebted cable operator, must sell assets and continue to extend the maturity dates of debt the next 18-24 months to avoid a bankruptcy filing, analysts said. The firm, which Wed. exchanged $6.9 billion in debt, faces many risks unless it takes further action, said observers such as Standard & Poor’s credit analyst Eric Geil: “They'll have to have more transactions… because the cash flow growth is not sufficient to enable them to meet their debt maturities out past 2007.” Geil dropped Charter’s corporate credit rating to “SD” for selective default. Still, he said, “they do have some breathing room for the next couple of years.” The company, with about $20 billion in debt, has the highest debt to cash flow ratio of any publicly traded U.S. cable operator, he said.
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Charter’s plan to sell systems with 250,000 subscribers isn’t enough to shore up its balance sheet, said Geil and Wall Street securities analysts. Selling “250,000 subscribers is really only going to be a drop in the bucket in proceeds relative to their total debt,” Geil said. “If they get to the point where operations haven’t turned around sufficiently and the banks are just less patient with things, [a Chapter 11 filing] clearly looms as a possibility.” Still, Geil said, the firm has plenty of ways around a trip to bankruptcy court. The company has $3.4 billion in debt maturing in 2007-2009, he said. Selling its systems in Orange County, Cal., would keep the company out of a cash crunch, said Jefferies & Co. analyst Robert Routh: “Orange County would do it, that’s really what they need to do. They really have to give up the ship in that area… to restructure the balance sheet.”
Analysts we spoke with said a bankruptcy filing isn’t imminent, and some called it unlikely. “I do not see the company going into bankruptcy; I think Paul Allen has too much invested in it, both in terms of money as well as psychologically, to allow that to happen,” said Routh: “Given the sale of the right systems, there is no reason that should happen.” Allen has a large stake in Charter. RCN, another company in which he had a large stake, filed for bankruptcy, wiping out equity value. RCN emerged from bankruptcy in Dec. “We have no additional specific transactions to talk about now,” said a Charter spokesman. “We're going to continue to take an opportunistic approach.”
Charter’s other options include refinancing credit lines and an equity infusion, said UBS analyst Aryeh Bourkoff. The firm can’t tap the stock market, where its shares have traded around $1, until it sells some assets and restructures debt, Bourkoff said: “If there’s a plan to fix the company, then it could attract some equity interest, if they start to do these other things first… ultimately this company needs an equity infusion.” There’s also concern about Charter’s ability to compete with satellite and Bell rivals. “We are still very skeptical about how solid or how healthy their core operations are,” Fulcrum analyst Richard Greenfield said: “The thing that concerns me is that they don’t have a whole lot of financial flexibility, and I think that puts them in a poor position vis a viz the competition.”