Charter Holders Share in Joy of Debt Paydown

Shares in the cable operator rally after it goes to the market for more financing.
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What was sauce for Charter Communications' (CHTR) - Get Report debt was sauce for its equity Friday.

The cable TV system operator controlled by


(MSFT) - Get Report

billionaire Paul Allen said it was planning to raise $1.7 billion to buy back debt that begins to mature two years from now.

That move -- which gives the company more time to cut debt and reassures investors that it will continue as an ongoing concern -- plus a separate debt-related announcement sent Charter's stock up more than 25% Friday.

If successful, the debt buyback plan represents a "significant extension" of the cable operator's liquidity, says UBS analyst Aryeh Bourkoff.

Charter's shares, which dipped to 76 cents four months ago amid fears the company would have to file for bankruptcy, traded at $5.08 Friday, up $1.10.

Benefits Management

Under the plan announced Friday, Charter will raise the $1.7 billion by issuing new senior notes in a private placement. Out of those proceeds, an expected $1.1 billion will be used to fund a previously announced cash tender offer for convertible notes due in 2005 and 2006.

The major payoff of that transaction, says Bourkoff, is that it pushes Charter's first major threat to the company's liquidity out from 2005 -- the maturity date for the first set of convertibles -- to 2007, when the company has $600 million in previously issued senior notes coming due.

Another benefit, says a buy-side analyst who spoke on condition of anonymity, is that the private placement shows Charter's ability to access the capital markets -- a move that "speaks to it as an ongoing entity," says the buy-sider, not a company with imminent bankruptcy risk.

Also positive for equity holders is that Charter is buying back the convertible debt at a discount, paying 80 cents or 82.5 cents for each dollar of outstanding principal. A successful tender offer, says Bourkoff, will result in a $261 million reduction of the face value of Charter's debt -- meaning an accretion to equity holders of about 41 cents per share.

Value Added

Separately, Charter said in a

Securities and Exchange Commission

filing Thursday that a special committee of its board of directors decided that Allen, Charter's chairman, should contribute a certain "preferred membership interest" in a Charter entity to Charter. Though Allen disagrees with the committee, Bourkoff calculates that if Allen goes through with the transaction, the effective conversion of the preferred from debt to equity would add nearly a dollar of value to Charter's equity holders.

If these transactions were consummated, the total per-share accretion from the convert buyback and the preferred, says Bourkoff, would amount to $1.40 on top of his current $3.50 price target for the stock. That would presumably put the target at $4.90 a share -- not far from where Charter's stock was trading Friday.

Bourkoff has a buy rating on Charter's bonds and a neutral rating on the equity. Bourkoff, a member of his team or one of their household members holds Charter stock.