NEW YORK, Jan 17 (IFR/RLPC) - Charter Communications
will test the capacity of the high-yield bond and
leveraged loan market the way Verizon did in investment-grade if
it is successful in its attempted takeover of Time Warner Cable
Its USD37.3bn hostile bid, based on an offer of USD132.50 a
share, would require as much as USD24bn in debt financing.
Although the details of the package still need to be ironed
out, and could change if Charter increases its rejected offer or
joins up with a rival such as Comcast, it will probably be
structured as a Double B type credit with about six times
leverage, bankers said.
Regardless of the fine-tuning, the bonds and loans each have
the potential to be record-breakers in terms of size. The bond
component will probably overtake Sprint's USD6.5bn deal that was
priced last year as the largest ever junk bond, while the loan
piece could surpass HJ Heinz's USD9.5bn loan from last year -
and even Clear Channel's USD10.7bn deal from 2008.
With about USD60bn in debt, the combined company would also
become the biggest high-yield issuer in the market - larger even
than Telecom Italia - raising some questions as to how
much investors will be able to own in the name.
Despite this, bankers are confident the deal can be done -
likening it to the USD28bn buyout of Heinz last year by Warren
Buffett's Berkshire Hathaway, which needed about USD14bn of new
Even another big potential deal in the market requiring
jumbo financing shouldn't matter, something bankers have to
consider given speculation that Sprint - 80% owned by
SoftBank Corp - may bid for T-Mobile.
"This isn't going to be a seven times leveraged deal with no
equity. It will have a Double B type capital structure, and
investors say they need deals like this in size," said one debt
capital markets banker.
As one investor put it: "The market is wide open."
Charter, rated Ba3/BB- by Moody's and S&P, described the
financing package as "prudent, with a longer tenor than Charter
today and low cost".
It has fully negotiated USD20.5bn in new debt and a USD3.5bn
bridge loan with its four banks - Bank of America Merrill Lynch,
Credit Suisse, Deutsche Bank and Goldman Sachs - and would also
need to refinance existing debt of both companies if the deal
"There's bound to be a lot of playing around to see where
the company can get the most benefit and the cheapest cost of
capital," said one analyst.
That almost certainly means that TWC's existing USD25bn
bonds will stay in place. Currently rated Baa2/BBB/BBB, those
bonds will be the cheapest debt Charter will have at its
disposal, though they will almost certainly fall to junk status.
Moody's is so far the only agency to place the ratings of
the companies on review for downgrade.
"I can't see any reason why those bonds will not be left in
the capital structure. Just as in the Heinz buyout, they will be
subordinated, and the new bonds will come in above them," said
another leveraged finance banker.
"It makes no sense to take them out. They not only provide
cheap debt, but they limit the amount of new debt that has to be
With no change of control language in those bonds, their
prices in secondary trading have sunk. In fact, they have been
trading more like a Ba1 entity since talk of a bid first emerged
There is some protection for bondholders that will affect
the structure of the bond financing, but it's pretty negligible.
Moody's reckons that only USD4bn-USD5bn of new secured debt can
be added to the new capital structure due to indentures on the
TWC bonds that cap the amount of additional liens of secured
The bottom line, though, is that this is just the first
round of what is inevitably going to be a long process.
Major TWC shareholders have said they would be receptive to
a higher offer, but there's also a chance that other cable
players such as Cox could surface with rival bids.
Then there's Liberty Media. Analysts at CreditSights say
Liberty could inject USD4bn to USD5bn of cash into Charter in
order to maintain a 27% stake in the combined Charter/TWC entity
- a move that would limit the amount of debt Charter would have
Liberty has several pockets of liquidity it could tap, they
say, including margin loans and the ability to raise incremental
funds at SIRI. A cash injection of that magnitude could keep the
Charter leverage only modestly above five times, with a quick
roadmap back below that level through growth and synergies,
As the first analyst said: "Whatever happens, TWC is now
fully in play."