Small pieces of Charter Communications traded down in the 85 1/8 to 85 1/2 range after Moody's Investors Service downgraded the bank debt from B1 to B2. The report cited the need for the company to restructure in the near-to-intermediate term. "They are basically going to run out of time," said Russell Solomon, Moody's analyst. "The ultimate problem is that cash flows didn't grow in accordance with expectations," he said. Solomon explained that debt service, now more than $1 billion a year, has become too high in comparison.
Traders think the paper will sink down into the low 80s. "There's really nothing to propel this paper," said one dealer. "I think [bank lenders] want the bonds to take a haircut and take some equity so that cash flow can go back into the company." The bank debt had been quoted in the 86 1/2 to 87 1/2 context prior to the downgrade, according to LoanX.
Charter would be able to avoid a restructuring if cash flow improves or its lending group offers more leniency, noted Solomon. The company's maximum leverage covenants in four of its subsidiary bank agreements will step down this year and may require some modifications. Moody's anticipates bank lenders will allow the company to revise the covenants, "given their structural seniority and sizeable perceived excess asset value coverage...despite their lack of security in those assets." Charter is currently suffering from basic subscriber losses as a result of a number of factors that include its own tighter credit standards, rate hikes and satellite competition, noted Moody's. Call to officials at Charter were not returned by press time.