May 21, 2018
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Time Warner Cable bid creates downgrade risk

By Victoria Stilwell and Matt Robinson, Bloomberg

NEW YORK — Time Warner Cable bonds are falling four times as fast as peers, costing creditors $1.8 billion in value, as billionaire John Malone tries to mount a leveraged buyout that may push the cable company into junk.

Malone’s Liberty Media Corp. is attempting to structure an offer with enough cash to satisfy shareholders of the second- largest U.S. cable company after managers rebuffed an earlier advance, people familiar with the discussions told Bloomberg News on June 27. Two of the people said Liberty Media is considering borrowing against its own or Time Warner Cable’s assets to raise funds, spurring a 7.8 percent average drop in market value of the cable company’s dollar-denominated bonds to $21.7 billion, Bank of America Merrill Lynch index data show.

“The plan that Malone is putting forth, you’re talking about $20 to $40 billion of additional secured debt,” Scott Kimball, a money manager at Taplin Canida & Habacht LLC, a BMO Financial Group unit that oversees $8 billion, said in a telephone interview. “If you end up having $40 billion in debt outstanding, most of which is going to end up being secured, the unsecured debt, which is the existing debt, would probably fall deeply into junk territory.”

Adding just $20 billion of new debt would increase the combined company’s ratio of debt to earnings before interest, taxes, depreciation and amortization to 5.4 times, in line with a speculative-grade rating in the Ba category, at least two levels below Time Warner Cable’s current Baa2, Neil Begley, a Moody’s Investors Service analyst, said in a telephone interview. Standard & Poor’s grades the company BBB, equivalent to the Moody’s rating.

Time Warner Cable, which while profitable is contending with fewer video subscribers, would help Liberty’s 27 percent-owned Charter Communications Inc. stem seven straight quarters of declining year-on-year operating income by increasing bargaining power with content providers.

Justin Venech, a spokesman for New York-based Time Warner Cable, declined to comment on the company’s bond performance or the possibility of a merger with Charter. Liberty Media spokeswoman Courtnee Ulrich didn’t respond to an email and phone call seeking comment.

Time Warner Cable’s $1 billion of 4 percent senior unsecured notes fell 6.8 cents to a record low 92.1 cents on the dollar during the four days ended July 2, raising their yield to 5.2 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities were little changed on July 3.

The company already has lost its investment-grade status in the eyes of derivatives and debt traders, according to Moody’s capital markets research group. Based on credit-default swap and bond prices, Time Warner Cable’s implied debt rating fell to Ba1, the top speculative grade after the report of Malone’s interest.

The decline in market value of Time Warner Cable bonds since June 26 compares with a 1.9 percent drop for the Bank of America Merrill Lynch U.S. Media Index. Time Warner Cable’s bonds, with a face value of $21.1 billion, are the gauge’s worst performer on a total return basis this year, with a 15 percent decrease.

A takeover would probably include new debt on top of existing notes from Time Warner Cable and Charter, as well as an equity component, Begley said. Charter already has the most debt among junk-rated U.S. cable companies, with $12.8 billion owed, according to data compiled by Bloomberg.

Almost $30 billion in U.S. media deals have been announced this year, the highest level of merger activity for any industry except food, Bloomberg data show. The transactions are led by Comcast Corp.’s $16.7 billion purchase of General Electric’s remaining stake in NBC Universal in March.

“The general theme is there needs to be consolidation in the cable market,” Matthew Duch, a money manager at Calvert Investments in Bethesda, Md., said in a telephone interview. Calvert oversees more than $6 billion in fixed income, including the debt of Time Warner Cable and Charter. “John Malone has made very clear that that’s his vision, and he wants to be the leader in doing that.”

Liberty proposed a premium-free, friendly merger in late May to Time Warner Cable Chief Executive Officer Glenn Britt, who rejected the offer without taking it the board because it was informal, according to a person with knowledge of the situation.

Time Warner Cable bonds lack provisions that would protect them from takeovers, leaving holders “horribly exposed” to an acquisition by Charter, according to Adam Cohen, the founder of independent research company Covenant Review LLC. The bonds don’t contain any limitation on unsecured debt incurrence and dividend payments, and many Time Warner Cable assets can be transferred to Charter entities.

“The combined entity will be junk status, and the Time Warner bonds could be even junkier than the Charter bonds,” Cohen said in a telephone interview. “This could be one of the worst covenant-related disasters ever for investment-grade bondholders.”

Credit-default swaps tied to Time Warner Cable have climbed 97 basis points since June 26 to a mid-price of 229.3 basis points, the highest level since April 2009, according to prices compiled by Bloomberg. That means it would cost the equivalent of $229,300 annually to protect $10 million of obligations for five years. Swaps typically rise as investor confidence deteriorates.

Malone, the largest private landowner in the U.S. with 2.2 million acres of ranch and timber land, is also head of the world’s largest cable operator after Liberty Global, a separate company of which he is chairman, acquired Britain’s Virgin Media this year and Germany’s Kabel Baden-Wuerttemberg in 2011.

The 72-year-old plans to use his stake in Charter to rebuild a U.S. cable empire, with both large and small deals seen giving the company more leverage in negotiating programming contracts, he said at Liberty Media’s investor meeting on June 4. Shares of Charter have rallied 14 percent since then, while Time Warner Cable stock has climbed 18 percent.

Time Warner Inc. spun off its cable unit in March 2009 leaving the former parent as a content creator. Its former distribution arm, which had revenue last year of $21 billion, trails U.S. market leader Comcast’s $39.6 billion from cable, while Charter is third with $7.5 billion, according to Bloomberg Industries data.

Malone’s cable career traces back to his becoming CEO of Tele-Communications Inc. in 1973. He sold the cable company to AT&T in the 1990s and then continued with media dealmaking, mostly through companies under the Liberty banner.

“It’s very easy to say, ‘Hey, synergies, put the balance sheets together, shareholders are happy,’ ” Sachin Shah, a special situations and merger strategist at Albert Fried & Co. LLC in New York, said in a telephone interview. “But the bondholders are equally concerned about the cash flow and what happens in the near term.”

With assistance from Alex Sherman in New York.


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