Charter Communications makes pre-packaged Chapter 11 filing; plan has $3 billion in new capital

By Caroline Salls

Pittsburgh, March 27 - Charter Communications, Inc. made a pre-packaged Chapter 11 bankruptcy filing Friday in the U.S. Bankruptcy Court for the Southern District of New York as the next step in a financial restructuring that is expected to reduce the company's debt by roughly $8 billion, according to a news release.

"The financial restructuring is good news for Charter and our customers and, if approved, will result in Charter being better positioned to deliver the products and services our customers demand now and in the future," president and chief executive officer Neil Smit said in the release.

"Charter's operations are strong, and throughout this process, we will continue serving our customers as usual. We look forward to an expeditious restructuring, and once completed, we believe that Charter will be a stronger company."

As previously reported, Charter reached agreements-in-principle in February under which members of a debtholders committee would invest more than $3 billion, including up to $2 billion in equity proceeds, $1.2 billion in roll-over debt and $267 million in new debt to support the overall refinancing.

Charter expects the proposed restructuring to position it to generate positive free cash flow through significant interest expense reductions.

Plan support

The company said its pre-arranged plan of reorganization is supported by Paul G. Allen and his affiliates and by the bondholder committee, which consists of holders of about 73% in principal amount of CCH I, LLC's 11% senior secured notes due 2015 and holders of roughly 52% in principal amount of the 10¼% senior notes due 2010 and 2013 of CCH II, LLC.

Allen will continue as an investor and will retain the largest voting interest in the company, according to the release.

Allen distribution

Under the plan, Allen and his affiliates will receive the right to exchange, directly or indirectly, all or a portion of their reorganized holding company equity for new class A stock and shares of new class B stock representing 2% of the equity value of the reorganized company and 35% of the combined voting power of the reorganized company's capital stock.

In addition, Allen and the affiliates will receive warrants to purchase shares of new class A stock, with a term of seven years in an amount equal to 4% of the equity value of the reorganized company; $25 million in satisfaction of amounts owed to CII under a management agreement; $150 million in cash; $85 million of new CCH II notes, which will be deemed transferred from the existing holders of CCH I notes; and up to $20 million in cash for payment of actual out-of-pocket fees and expenses in connection with the proposed restructuring.

The plan also calls for the reinstatement of the current debt of the CCO Holdings, LLC and Charter Communications Operating, LLC subsidiaries. Charter said CCO Holdings' unsecured notes will continue to accrue interest that will be paid upon emergence from bankruptcy.

Rights offering

According to the disclosure statement, the restructuring will include an up to $1.6 billion rights offering. An additional $400 million in cash will be raised through an over-allotment option.

Holders of $4.1 billion in total principal amount of notes issued by CCH I and CCH II have agreed to fully backstop the rights offering and have committed to purchase up to $267 million in additional new CCH II notes.

New stock

Shares of new class A stock will be issued to rights offering participants, equity backstop parties upon the exercise of the over-allotment option, holders of CCH I note claims, the Allen entities upon exchange of their reorganized holding company equity, warrant holders and holders of equity-based awards under a management incentive plan.

Meanwhile, shares of new class B stock, which will entitle the holder to a number of votes equal to 35% of the combined voting power of the capital stock of the reorganized company, will be issued to authorized class B holders.

Each share of new class B stock will be convertible into one share of new class A stock at any time from Jan. 1, 2011 until Sept. 15, 2014, at the election of a majority of the disinterested members of the board of directors and at any time after Sept. 15, 2014 at the election of a majority of board members not elected by class B stockholders.

Shares of new 15% preferred stock will be issued to holders of CC I notes. The preferred stock will have an initial liquidation preference of $1,000.

The board of the reorganized company will also be authorized to issue up to 250 million shares of an additional series of preferred shares.

Plan creditor treatment

Under the pre-packaged plan:

• Holders of administrative expense claims, priority tax claims and priority non-tax claims will recover 100% in cash;

• Holders of secured claims will recover 100% either in cash plus interest or the return of the collateral securing the claim;

• Holders of general unsecured claims will recover 100% either through reinstatement of their claims or full payment in cash;

• Holders of CCI notes claims will recover 19.3% through a share of new preferred stock and $24.25 million in cash;

• Holders of CII shareholder claims will receive 100,000 shares of new class A voting common stock issued by reorganized CCH II;

• Holders of CCH notes and CIH notes will recover 0.4% and 0.5% in warrants;

• Holders of CCH I notes claims will recover 12.7% through their share of new class A common stock equal to 100% of the new common stock outstanding as of the effective date and the right to participate in the rights offering;

Holders of CCH II notes claims will recover 100% through full payment in cash unless the holder is a rollover party or elects to exchange the notes for new CCH II notes;

• CCO notes and credit facility claims will be reinstated;

• Holders of CCO swap agreement claims will be paid in full in cash plus interest; and

• Holders of Charter Communications interests and section 510(b) claims will not receive any distribution.

Cash collateral request

Charter expects its cash on hand and cash from operating activities to be adequate to fund its projected cash needs, and therefore the company does not intend to seek debtor-in-possession financing, the release said.

However, the company is seeking court approval to use the cash collateral of its pre-bankruptcy lenders for working capital and general corporate purposes.

Under the proposed order, the cash collateral use would expire six months from the entry of the interim order.

Debt details

According to court documents, Charter had $13.882 billion in total assets and $24.186 billion in total debt at Dec. 31. The company did not list its largest unsecured creditors.

The company has appointed Gregory L. Doody as its chief restructuring officer. In this role, Doody will oversee the restructuring process.

Accelerations

According to an 8-K filed Friday with the Securities and Exchange Commission, the bankruptcy filing prompted acceleration of several of the company's debt instruments, although the company said it believes that any attempt to enforce the accelerations are covered by the automatic stay imposed by the bankruptcy filing.

The accelerated debt instruments include $3 million of 5 7/8% convertible senior notes due 2009; $479 million of 6½% convertible senior notes due 2027; $53 million of 10% senior notes due 2009 issued by Charter Communications Holdings, LLC; $4 million of 10¾% senior notes due 2009 of Charter Communications Holdings, LLC; and $25 million of 9 5/8% senior notes due 2009 of Charter Communications Holdings, LLC.

The filing also triggered acceleration of the $1 million of 10¼% senior notes due 2010 of Charter Communications Holdings; $1 million of 11¾% senior discount notes due 2010 of Charter Communications Holdings; $47 million of 11 1/8% senior notes due 2011 of Charter Communications Holdings; $60 million of 13½% senior discount notes due 2011 of Charter Communications Holdings; $51 million of 9.92% senior discount notes due 2011 of Charter Communications Holdings; $69 million of 10% senior notes due 2011 of Charter Communications Holdings; $54 million of 11¾% senior discount notes due 2011 of Charter Communications Holdings.

Also accelerated were the $75 million of 12 1/8% senior discount notes due 2012 of Charter Communications Holdings; $151 million of 11 1/8% senior notes due 2014 of CCH I Holdings, LLC; $581 million of 13½% senior discount notes due 2014 of CCH I Holdings; $471 million of 9.92% senior discount notes due 2014 of CCH I Holdings; $299 million of 10% senior notes due 2014 of CCH I Holdings; $815 million of 11¾% senior discount notes due 2014 of CCH I Holdings; $217 million of 12 1/8% senior discount notes due 2015 of CCH I Holdings; and $3.987 billion of 11% senior notes due 2015 of CCH I.

In addition, the filing prompted acceleration of $1.86 billion of 10¼% senior notes due 2010 of CCH II, LLC; $614 million of 10¼% senior notes due 2013 of CCH II; $800 million of 8¾% senior notes due 2013 of CCO Holdings, LLC; $1.1 billion of 8% senior second-lien notes due 2012 of Charter Communications Operating, LLC; $770 million of 8 3/8% senior second-lien notes due 2014 of Charter Communications Operating; $546 million of 10 7/8% senior second-lien notes due 2014 of Charter Communications Operating; $8.2 billion of loans due 2014; and $350 million of loans due 2014.

Charter Communications is a St. Louis-based provider of video services, high-speed internet services and telephone services to residential and commercial customers on a subscription basis. Its Chapter 11 case number is 09-11435.

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