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— Backstory —
No doubt they will, as last week's research note from Morgan (no relation to the columnist) underscores just how many "intertwined and conflicting positions" Charter's various constituencies represent. Throw in one of the most complicated capital structures ever assembled -- 28 issues of debt by seven corporate entities -- and the "extended bickerfest" the analyst expects already seems a fait accompli.
Charter itself appears among the conflicted. The St. Louis cabler, which majority owner and Microsoft Corp. co-founder Paul Allen took public in 1999, claimed in a November filing it would be able "to fund its projected cash needs, including scheduled maturities, through 2009." Then it missed $74 million in interest payments on Jan. 15. That it did so while sitting on $900 million in cash suggests that, here on out, not every move will be the obvious one. Lazard, which Charter retained in December to improve its financial flexibility, most certainly advised its client not to part with its cash. By doing so, however, the investment bank started the 30-day clock on a possible default that, Charter freely admits, "could lead to the acceleration of indebtedness." The gambit is designed to get Charter's creditors to act in their collective best interest. "This is a classic good business, bad balance-sheet situation," Morgan says, "so simply eliminating some debt should cleanse Charter of its past financial sins." Morgan even ventures that Charter's most objective investors would pick the same place to draw the line between what a restructuring would keep as debt and recast as equity. That line would cut through a corporate entity called CCH II LLC, thus turning about $7.5 billion of Charter's $21.1 billion in current debt into restructured equity. "Debt through that level represents roughly $13.6 billion of debt, or roughly six times the company's annualized Ebitda," the analyst reports. "Under this approach, Charter would be paroled from the financial restructuring penitentiary with a new suit of clothes (aka balance sheet) that actually fit, a little money in its pocket and a fresh attitude." The penitentiary analogy is apt in that game theory known as "prisoner's dilemma" promises to deny this happy outcome. The dilemma, as classically presented, is shared by two apprehended suspects. If one suspect confesses to the police and the other remains silent, the one who confesses goes free and the one who remains silent receives a 10-year sentence. If both remain silent, both get a token six-month sentence. And if both confess, each receives five years. "The puzzle illustrates a conflict between individual and group rationality," posits the Stanford Encyclopedia of Philosophy. "A group whose members pursue rational self-interest may all end up worse off than a group whose members act contrary to rational self-interest. ... A closely related view is that the prisoner's dilemma game and its multi-player generalizations model familiar situations in which it is difficult to get rational, selfish agents to cooperate for their common good." There's also an "iterated" version of prisoner's dilemma, the encyclopedia continues, in which a suspect who confesses in one round of the game can be "punished" in subsequent rounds. This version will likely be relevant as Charter and its creditors endure round after round of restructuring negotiations. "If everyone else participates and I sit tight, my bonds are worth a lot more than the good-hearted majority that agreed to hold hands," Morgan writes. "Of course, failing to reach some level of agreement is bad for everyone, and especially the more junior-ranking investors." The analyst appreciates that in applying prisoner's dilemma to Charter's bondholders, some qualify as both suspects at once. That is, some with bonds destined for worthlessness also own other tranches of Charter debt, including the theoretical CCH II cutoff level. "Their best chance of recouping their investment is to argue for as much debt on the restructured company as possible, leaving a higher percentage of equity for the junior parts of the capital structure." It's not for nothing, then, that his research note carries the title "The Alcatraz of Prisoner's Dilemmas." Richard Morgan covers media for The Deal. |
Todd Morgan of Oppenheimer & Co. isn't the only high-yield analyst who expects Charter Communications Inc. to go belly-up. But his comparing the inevitable event to Bill Murray's "Groundhog Day" prediction -- "It's gonna be cold, it's gonna be gray, and it's gonna last you for the rest of your life" -- imbues the bankruptcy with a severity that few have yet to appreciate.
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