Charter Replaces Debt But Leaves High Leverage

The proposed $6.5 billion of combined secured bank credit facilities and $1.5 billion new senior secured bonds for Charter Communications Operating, a subsidiary of Charter Communications, will provide the company additional liquidity to meet its debt obligations but will not change its net debt. The new financing is viewed as an interim step as the company moves toward a more sustainable capital structure, said Sebastian Bacchus, a Moody's Investors Service associate analyst. The rating agency has assigned B2 ratings to both the facility and bonds.

However, given Charter's reasonable high possibility of default, Moody's has kept the company's senior implied ratings at Caa1. The rating reflects Charter's unsustainable leverage and the prospects that the company would be unable to meet all obligations relative to their face values under a default scenario. "Our feeling has been for some time that Charter will not be able to grow into its current capital structure. As a result, it needs to remove some debt from its balance sheet," said Bacchus. "We did not change the senior implied because this transaction does not change their leverage." The domestic cable company has also faced a reduction in the amount of credit lines available for the company to $6.5 billion from $9 billion.

The transaction will give Charter some time to reduce both the near term default risk and the likelihood of potential covenant violations. The company is doing this transaction partly to create liquidity and extend maturities, explained Derek Chang, Charter's executive v.p. of finance and strategy. But the rating agency expects Charter to continue to burn cash and keep borrowing during the next period. "We expect that the company will need to re-equitize in the range of $5-6 billion of balance sheet leverage," said Bacchus. The new senior secured bank credit facilities rating reflects asset coverage of two times in a distressed scenario to three times at present.