In a big move to restructure its massive debt, Charter Communications is trying to shed $2 billion worth of liabilities by convincing investors to exchange bonds for new notes that are worth far less. But the new bonds would offer better protection if the company ever files for Chapter 11.
The exchange offer announced Wednesday essentially calls for investors to surrender about a quarter of the value of their holdings. Charter wants investors to swap 12 different series of notes worth $8.4 billion that the company has sold over the years.
In exchange, they would get new notes worth just $6.4 billion, 25% less.
As an inducement, investors would be offered equity in the company that Charter says is worth an additional $421 million. That would reduce bondholders' haircut to 20%. The plan would also stretch out Charter's maturities, giving the cable operator around three additional years to repay the bonds.
The exchange offer is the biggest in a series of steps by Charter to control its $19 billion in total debt, but it is far from completely resolving the company's problems. According to UBS analyst Aryeh Bourkoff, Charter's debt will hit a massive 10 times annual cash flow this year. Other cable operators start getting uncomfortable when their leverage hits five times.
If successful, this deal would reduce Charter's leverage to around 9 times cash flow. But by stretching out the maturities it would give Charter much more breathing room to turn around its ailing operations and hope that the general value of cable systems increases.