Secret sauce
Charter Communications long had its eye on US telecoms giant Time Warner Cable. But the high-yield company needed to finance the landmark purchase without hamstringing the business with crippling interest payments. This was no easy deal. The transaction – complicated, uncertain but ultimately successful – richly deserves to be IFR’s Americas Financing Package of the Year.
When Charter Communications agreed to buy Time Warner Cable in May for US$78.7bn including debt – just over a year after it lost its hostile bid for the cable operator to Comcast – TWC bonds sank. Hours later, when the first details of the financing emerged, and Charter declared its intention of maintaining an investment-grade rating for TWC bonds, they rallied again. Charter president and CEO Thomas Rutledge was sitting pretty.
But then the market began to ponder: How can a company like Charter, which only had high-yield debt, pull that off?
“We knew we were talking about a very large capital structure with around US$61bn–$62bn of debt,” said Charles Fisher, a senior vice-president in corporate finance at Charter.
“That’s a lot of capital to raise, but it’s also a lot of capital to continue to manage over time. We wanted to make sure we had access to all the markets.”
So rather than bunging a load of new debt on top of the existing TWC bonds – and creating a pure high-yield capital structure that might have proved costly and difficult to refinance in times of stress – Charter did the unthinkable.
It worked out a way to give security to the new and existing unsecured TWC bonds, ensuring they maintained investment-grade index eligibility – and with that, accessed the most stable part of the corporate debt capital markets.
“It was the secret sauce,” said Fisher, on the US$15.5bn investment-grade bond that the company sold a few weeks later. That was followed a couple weeks later with a US3.8bn term loan, led by Bank of America Merrill Lynch.
The IG bond, led by Goldman Sachs and significantly bigger than the US$10bn–$12bn Charter had first envisaged, was the linchpin of the financing, ensuring that both the company and its bankers had de-risked. After the loan and IG bond were sold, about 90% of the financing was complete.
Charter had a US$2bn term loan held by its relationship banks and a US$1.7bn revolver – giving it leeway to wait for the riskiest part of the entire plan: a jumbo US$2.5bn high-yield bond.
In the end, and in the face of a re-pricing in the junk bond market, Charter priced the 10.25-year unsecured issue, led by Credit Suisse, at just 5.75%.
Charter’s banks knew that the M&A process might be long and difficult, but it was able to get banks comfortable on terms that worked for the company.
Charter told its banks – BAML, Goldman Sachs, Credit Suisse, Deutsche Bank and UBS – they needed to provide around US$6bn of capital each, and that they needed to keep that commitment for upwards of 18 months.
But the company then said, as Fisher put it: “We want to pay as little as we can in terms of commitment fees and gross spread, and we want the caps to be as tight as they possibly can be.”
In return, Charter said it would go to market to place the debt as soon as market conditions were favourable. Built into the commitment papers was an inducement to do so.
“Every three months we hadn’t gone to market, the commitment would step up,” said Fisher.
“That was relatively bespoke. We basically said: Give us below-market rates in the short term, and we’ll work our way up to market rates – or even beyond market rates if we haven’t taken you out of your commitment.”
Now, the most expensive debt in the capital structure is the old TWC bonds, averaging 6.4%. Even so, the average cost of capital for the new debt financing is 4.77%, and 5.48% for the whole debt pile – all the way out to 40 years.
Charter has smoothed out maturities in practically every year out to 2055; pro forma about 85% of its debt is, remarkably, due after 2019.
Now, other would-be borrowers are looking at the financing as a template for future transactions – most notably Dell for its US$67bn purchase of EMC.
“It’s being pitched,” said Fisher. “It’s being talked about.” And for good reason.
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