Corporate Restructure Conference

Earlier in the week, we had note from Wharton's Restructuring Conference. We continue with Part 2 of the restructuring conference with more notes and commentary:

One of the two morning sessions was a case study panel that discussed the Charter Communications restructuring. The panel included most of the key parties involved in this historic case, which was the largest pre-arranged bankruptcy filing ever.


Cyrus Pardiwala of PricewaterhouseCoopers as moderator (no role in Charter)
Richard Cieri of Kirkland Ellis – Debtors’ counsel
Gregory Doody – Executive Vice President and General Counsel, Charter Communications
Alan Kornberg of Paul, Weiss, Rifkind, Wharton and Garrison LLP – Bondholder Committee Counsel
James Millstein – Senior Restructuring Advisor, U.S. Department of Treasury (Formerly Lazard financial advisor to Charter)
Eric Zinterhofer – Senior Partner, Apollo Management

Mr. Millstein walked the audience through how Charter’s “Byzantine” cap structure came into existence through a multitude of bond issues. For those unfamiliar to Charter, the company had one of the most convoluted corporate structures known to man. Although the Charter operations were generating cash, the company’s highly leveraged balance sheet required access to the high yield bond market to refinance maturities. With the complete shutdown of the new issue market in 4Q08, Charter’s auditors refused to issue a going concern opinion. This is what precipitated the restructuring.

At this point (December 12, 2008) the restructuring advisors began approaching bondholders regarding a debt restructuring. Most bondholders were shocked by the announcement because the company had the cash to continue making interest payments and assumed the runway was much longer. Once bondholders got past the initial shock, they (mostly) agreed that avoiding a freefall bankruptcy was a must. Both the company and creditors feared an “Adelphia-like bankruptcy” that would destroy a lot of value via a protracted valuation fight.

On January 15, 2009 the company announced that two of its subsidiaries did not make their scheduled interest payments. Mr. Millstein referred to this as “the hammer” to get more bondholders to the table during the 30-day grace period. It was around this time that the “cram up” idea was hatched. For those unfamiliar, the cram up was a new twist on reorganizations last year whereby senior debt is reinstated if all events of default can be cured prior to emergence. In fact, Mr. Cieri noted that the original idea came from a consumer bankruptcy case where an individual reinstated his car loan.

The bank debt reinstatement was the crucial part of the Charter case because the firm had several billion dollars of senior secured bank debt with a LIBOR+250 interest rate, which they guessed was anywhere from 500 to 700 bps cheap to where a new loan could get done. Obviously, JP Morgan—the agent bank—opposed being reinstated, although Mr. Millstein had a funny anecdote about how they at first didn’t even understand what the company was attempting to do. Were Charter unable to reinstate the bank debt, there would have been a much longer bankruptcy case that would have destroyed value and “killed” many of the junior creditors. This fight eventually resulted in a 19-day hearing where JP Morgan’s attorneys argued that Charter was violating a covenant in the credit agreement that prevented any group from owning more than Paul Allen. The attorneys argued that the bondholders committee amounted to a “13-d group” and thus violated the covenant. Backing up a bit, a huge part of the plan was Apollo putting up $1.6 billion for an equity investment. The company’s lawyers argued that the ad hoc committee did not constitute a group under rule 13-d because they purchased their bonds at different times, different prices and for different reasons.

Ultimately, Judge Peck sided with the company in an 82-page opinion that the panel agreed would be the lasting legacy of the case. { Judge Peck’s opinion } Mr. Kornberg made some interesting observations about how the JP attorneys essentially shot themselves in the collective foot by stating from the outset of the case that they were out to get their clients higher interest payments. He believes that judges have little sympathy for unimpaired creditors when junior creditors are a) taking a haircut and b) putting in new money.


Anonymous,  2/25/2010  

Not to be too technical, but that actually wasnt a "cram-up" it was a "reinstatement." Cram-up refers to giving a secured creditor a new peice of paper in satisfaction of its claim. Reinstatement refers to curing all defaults under the existing credit facility and giving the secured creditor back the exact same peice of paper it had pre-bankruptcy.

Also, the main issue in Judge Peck's decision was whether the ad hoc group of noteholders constituted a group for purposes of triggering the change of control EoD under JPM's credit agreement. If they were found to be a group and therefore triggered this default, reinstatement of the JPM facility (and its favorable terms) would have been impossible since reinstatement requires you to cure all defaults under the credit agreement as of the day you exit bankruptcy (other than the fact of having filed) and the COC would have been incurable.

Anonymous,  2/26/2010  

Thanks, both good points. You weren't being over-technical, I didn't know the difference.

Anonymous,  3/03/2010  

You had to love how the computer kept trying to install updates all through this presentation.

Anonymous,  3/17/2010  

"You had to love how the computer kept trying to install updates all through this presentation."
I meant the actual Wharton presentation. Millstein would be doing the laser pointer on the projection screen and the blasted little "Your computer will now restart to install updates" thing came up every couple of minutes.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.