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— Private Equity —
The Microsoft Corp. co-founder and his investment arm, Vulcan Capital, successfully persuaded key noteholders of Charter to form a crossover group that, even in bankruptcy, put up $3 billion in additional capital. These moves run so counter to most Chapter 11 proceedings that a distressed-debt specialist remarks, "The guy who normally gets thrown out first is, in this case, making out like a bandit." That's not technically accurate. The $7.4 billion Allen has personally invested in St. Louis-based Charter since his first cable acquisition in 1998 dwarfs the $305 million, plus up to 7% of the post-bankruptcy equity, that the prearranged plan proposes to return to him. But it is accurate in that Allen, Charter and key noteholders have aligned themselves in mutually productive and potentially protective ways. And they have done so by taking a "change of control" provision embedded in covenants governing Charter's credit facilities and turning it against the very banks for which the covenants were written.
The actual provision specifies that a default on Charter's credit facilities occurs should Allen's voting control ever fall below 35%. While this may not seem all that consequential, consider that Charter's credit facilities stood at $8.6 billion when it filed for bankruptcy on March 27. Then consider that these facilities now yield a not-so-rich 5.5%. Repricing them in this market would increase Charter's interest payments by a fatal $400 million-plus a year. A change of control, in other words, would serve Charter's banks well but wipe out $13.1 billion in credit obligations junior to the company's bank debt. That's the argument, anyway, Charter's restructuring team made to two senior groups of noteholders: CCH I, with $4 billion in outstanding debt; and CCH II, with $2.5 billion. Of these, noteholders representing 73% of CCH I debt elected to join the crossover group, as did noteholders representing 52% of more senior CCH II debt. The crossover group's first task after establishing a mutual interest was to concoct a plan to take out the 48% of CCH II noteholders indifferent to the plight of junior CCH I noteholders. A way to do so, the group realized, would be to pay them off at par. This would also allow the group to push down the restructuring's so-called fulcrum security -- the debt instrument most likely to convert to equity ownership -- to the CCH I level. A push-down, in turn, promises the proverbial something for everyone who's still involved with Charter once it emerges from bankruptcy. Among those definitely planning to be involved is the crossover group, which a restructuring participant characterizes as "an odd mix of mutual funds, private equity firms and distressed-debt types." It's also a good mix, the source continues, in that each of its components will be able to "horse-trade" its post-bankruptcy allocation of Charter debt and equity to satisfy the distinct needs of its portfolio. "Look for Apollo and Crestview to wind up with as much equity as they can," he says by way of example. To this end, eight group members have already committed $1.2 billion to refinance the debt now held by CCH II noteholders seeking to exit; four members are putting in $267 million in new debt; and six members are backstopping a Charter equity rights offering with $1.6 billion, which means they will pick up any rights distributed on a pro-rata basis that other members of the group would prefer to leave on the table. Yet it's all contingent on Charter's avoiding a change of control
that would permit a repricing of credit facilities. Allen and his
crossover group contend the company will remain in compliance,
post-bankruptcy, by leaving its controlling shareholder with 35% of the
combined voting power of the reorganized company's stock. And though
neither party can now guarantee success -- a court hearing on the plan,
which in the broadest terms seeks to lighten Charter's balance sheet by
$8 billion, is scheduled for July 20 -- observers already credit them
for raising the bankruptcy bar in terms of inspiration and cooperation.
Car chase |
Equity players normally don't carry much weight in bankruptcy negotiations. But Paul Allen, Charter Communications Inc.'s controlling shareholder, is no normal equity player. 
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