Charter Communications bank paper holds in at previous levels, but demand may have weakened

By Sara Rosenberg

New York, Jan. 2 -Charter Communications Inc.'s bank debt has managed to remain at relatively steady levels despite the amount of negative news that has recently been released regarding the company, including rating downgrades and management changes. However, demand for the paper has probably tapered off slightly, according to a trader.

In a quiet post-holiday session on Thursday, Charter's term loan B was quoted with an 83¼ bid and an 85¼ offer, the trader said, adding that although the news of corporate cleaning "scared people a little bit," pricing in the secondary was not shaken up too badly.

Following Charter's announcement prior to Christmas that certain executives were terminated, the bank debt fell off by about a point to around 84/85.

More specifically, the St. Louis cable company announced that David G. Barford, the executive vice president and chief operating officer, who had been placed on leave, was fired and replaced by Margaret A. Bellville. Furthermore, Kent D. Kalkwarf, the company's executive vice president and chief financial officer was also fired. Steven A. Schumm, Charter's executive vice president and chief administrative officer was named interim chief financial officer.

The decision to terminate Barford and Kalkwarf's employment at Charter was made following a review of various matters, including the grand jury investigation, the company said. Members of the board of directors, including the chief executive officer, are not targets of the investigation, according to a news release.

In addition to the management changes, Charter also announced that it is proceeding with the re-audit of its 2000 and 2001 financial statements. The re-audits of 2000 and 2001, as well as the audit of 2002 results, are expected to be completed in the first quarter of 2003.

And last on Charter's list of news was the current anticipation that the growth rate of fourth quarter revenue will be at or near the low end of its prior revenue guidance of 8 to 9% and fourth quarter operating cash flow will be less than previous guidance.

In reaction to the company's expectation of lower revenue and cash flow guidance for the 2002 fourth quarter, Standard & Poor's downgraded Charter and kept it on CreditWatch with negative implications. S&P cut CC VI Operating Co. LLC's $1.2 billion senior secured credit facility to B from B+, CC VIII Operating LLC's $450 million revolving credit facility due 2007, $500 million tranche A term loan due 2007 and $500 million tranche B loan due 2008 to B+ from BB- and Charter Communications Operating, LLC's $5.2 billion senior secured bank loan to BB- from BB.

S&P said it is concerned that the competitive pressure that has eroded the company's basic subscriber base could continue. Charter may be challenged to achieve operating improvement needed to stabilize deteriorating credit measures and generate break-even free cash flow in 2003.

The rating remains on CreditWatch primarily due to uncertainty surrounding the ongoing federal grand jury subpoena into Charter's subscriber accounting practices, S&P added. In an action related to the grand jury investigation, the company announced management changes that may likely benefit the company in the longer term, but could be disruptive in the near term, S&P said.

S&P said it is also concerned about the possibility of public debt restructuring transactions, given depressed debt trading levels. Completion of a sub-par exchange offer could be considered coercive to bondholders and tantamount to a default on initial debt issue terms.

Quotes on the bank debt barely moved after S&P's downgrade, according to the trader, since people were expecting an action like this to take place.

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