By Natalie Harrison, Danielle Robinson and Michelle Sierra
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 (TWC).
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 debt.
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 goes through.
"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 raised."
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 last summer.
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 debt.
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 to raise.
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, CreditSights said.
As the first analyst said: "Whatever happens, TWC is now fully in play."