Analyst Chops Charter

An analyst who initiated coverage of Charter Communications Inc. with a “Buy” rating two years ago has downgraded the MSO to “Neutral” as the risk of bankruptcy continues to hover around the nation’s fourth-largest cable operator.

Although Charter has recently become one of the top MSOs in terms of ARPU (average revenue per unit) growth and has seen margins expand, “the weight of its $21 billion of debt... is becoming too much for the company to bear,” observed Pali Capital analyst Richard Greenfield in a research note issued today.

Greenfield’s downgrade comes as Charter seeks out “financial alternatives” (likely a debt-for-equity swap) aimed at shining up the MSO’s ugly balance sheet. As of Dec. 10, Charter had cash and cash equivalents in excess of $900 million, a pile it will use to continue paying operating costs and expenses. (See Charter Seeking 'Financial Alternatives' and Opposite Ends of the Spectrum.)

Greenfield estimates that Charter needs to convert at least $8 billion to $9 billion of debt into equity in order to avoid bankruptcy.

The MSO “has no meaningful maturities before late 2010, which would normally have put [Charter] in a relatively stable financial situation (assuming debt markets begin to recover in the next 18 months),” he noted. “However, the company’s ability to distribute cash between various levels of its capital structure (which is needed to make interest payments) has become increasingly challenged.”

If Charter is successful at executing a debt-for-equity swap, Greenfield suggested that the MSO may become a more attractive takeover target for Time Warner Cable Inc. (NYSE: TWC), which, to this point, has been scared off by Charter’s massive debt load. But there are other financial hurdles that could hinder such a deal from coming together.

“Unfortunately, the key problem with the potential for a transaction in 2009/2010 is that TWC is about to take on nearly $11 billion of debt,” Greenfield added, referring to the financial elements tied to its coming separation from Time Warner Inc. (NYSE: TWX). (See Time Warner Cable Leaving the Nest.)

— Jeff Baumgartner, Site Editor, Cable Digital News