Though currently in SI retirement, Adam was a prophet.
More trouble for Charter:
Charter convertible deal could limit future options
Fri Jun 24, 2005 03:53 PM ET
By Dan Wilchins
NEW YORK, June 24 (Reuters) - A troubled convertible bond deal from cable operator Charter Communications Inc. (CHTR.O: Quote, Profile, Research) could limit the company's options in a few years when it looks to raise money, analysts said on Friday.
The company, controlled by Microsoft (MSFT.O: Quote, Profile, Research) co-founder Paul Allen, has had its fair share of difficulty already. Charter's free cash flow, by some measures, has been negative since the company started in the mid 1990s.
Its revenue growth has been lackluster, even as other cable companies have flourished. Charter is sagging under a $19 billion debt load, which costs over $1.5 billion a year to service.
The company likely has sufficient resources to make interest payments for at least 12 months to 36 months, analysts say. But after that, Charter will likely have to either raise money or engineer a debt-for-equity exchange with bondholders.
"Something dramatic has to happen with Charter," said Oren Cohen, principal at Brownstone Asset Management in New York, which owns Charter notes.
But one option that may not be available to the company when it needs to raise cash is selling convertible bonds, because its convertible investors already have been bitten and are likely to shy away from a second offering.
Charter sold $862.5 million of convertible notes last November and included a special twist to get the deal done: it promised to issue special shares along with the notes.
But it has not yet been able to register the shares with the Securities and Exchange Commission, according to a recent company filing.
It still aims to register the shares, but the delay is a big problem for hedge fund investors in Charter's convertibles. Convertible arbitrage funds often short a company's shares to hedge convertible notes.
Convertibles become more valuable as the issuer's stock price rises, so shorting the stock protects investors against the share price falling.
Hedge funds normally would have shorted Charter's common shares. But that was too expensive when the notes were issued because of the high percentage of the company's shares that had already been sold short. The special shares would have been made available for convertible investors to use for hedging.
Trouble with this deal could make it more difficult for Charter to sell convertible bonds in the future, said Michael Revy, managing director at Froley, Revy Investment Co. in Los Angeles.
A spokesman for St. Louis-based Charter said he cannot comment while the company is registering shares. A spokeswoman for Citigroup Global Markets, which underwrote the deal, and a spokesman for the SEC also declined to comment.
The company's low share price may also be a hindrance to future convertible issuance, a distressed debt analyst said. Charter's shares, which started the year at $2.29, traded on Friday at $1.23 on the New York Stock Exchange.
To be sure, the company may still be able to sell convertibles. Predicting the market outlook for 2007 is impossible right now, but if convertible issuance stays low, investors might be more amenable to unusual situations.
There also may still be a market for the securities among the growing number of investors who own convertibles outright rather than stripping out their equity and credit risk, assuming the price is right, Revy said.
BONDS STILL WORTH CONSIDERATION
Even with Charter's convertible bond difficulty, the company's corporate bonds might be worth looking at, analysts said.
Brownstone's Cohen noted that more senior notes offer a solid yield and should be repaid at par in the worst-case scenario of bankruptcy. (Additional reporting by Chris Sanders in New York and Kevin Drawbaugh in Washington, D.C.)
reuters.com |
