Charter bid drops, rebounds after downgrade; Dex Media terms tweaked

By Sara Rosenberg

New York, Oct. 28 - Charter Communications Inc.'s bank debt saw the bid side drop and rebound in response to Moody's Investors Services' downgrade of the company's and its subsidiaries debt ratings, according to market sources.

Meanwhile, commitments flowed in after the syndicate reworked certain terms of Dex Media East LLC's deal and the book is now filled, providing that investors don't back out due to the change in the company's leverage situation.

The bid dropped off on Charter Communications Inc.'s bank debt into the mid-70s following the ratings downgrade by Moody's Investors Service, according to a trader. However, the offer didn't move "so it was kind of irrelevant", he added. The St. Louis, Mo. cable company's bank debt ended the day with a bid of 79½ and an offer of 82.

Moody's lowered Charter Communications Holdings, LLC's senior debt to B3 from B2, Charter Communications Operating, LLC's senior secured bank debt to B1 from Ba3, CC VIII Operating, LLC's senior secured bank debt to B1 from Ba3, Falcon Cable Communications, LLC's senior secured bank debt to B1 from Ba3 and CC VI Operating, LLC's senior secured bank debt to B1 from Ba3. The review for possible further downgrade remains open.

"The downgrades reflect growing concerns about operating performance, as supported by recent disclosures of disappointing third quarter results and the removal of the company's chief operating officer, and subsequent downward revisions to our expectations governing future performance over the ensuing rating horizon," Moody's said. "Specifically, Moody's believes that cash flow growth at sub-double digit levels, spurred in large part by heightened customer churn and bad debt expense, will fall considerably short of prior expectations with respect to affecting targeted deleveraging and balance sheet strengthening by 2004.

"The continuing review will entail a comprehensive update meeting with management in an attempt to gain a better understanding as to where the operating mis-steps and shortfalls are occurring, whether or not they are correctable, and other steps that management may take to improve the company's financial flexibility in future periods," Moody's added.

Last week, Charter's bank debt saw a steady drop as investors showed their dislike for the company's management change and earnings forecasts. The bank paper settled in the 79/80, one trader told Prospect News on Friday, adding that these quotes were where the debt was "gyrating around".

Dex Media East LLC modified some of the terms of its new $1.49 billion credit facility (Ba3/BB-), according to a syndicate source.

Under the new terms, the $700 million term loan B was flexed up by 50 basis points to a spread of Libor plus 400 basis points. Furthermore, call protection was added at 102 in the first year and 101 in the second year to protect investors from the possibility that the company may refinance the loan if credit spreads improve, according to the syndicate.

The loan priced at a discount selling at 99.

"Once they flexed up, the book just filled out," the syndicate source said. But, because the bond deal has changed, leverage ratios have changed so the syndicate must check with investors to make sure everyone is okay with the new ratios, he added.

Overall the notes were reduced by $75 million, with the amount of senior bonds increased to $450 million from $350 million and the amount of subordinated bonds being sold cut to $525 million from $700 million. Additional equity will be put in to the company to make up the difference.

Overall leverage will be lower than expected upon completion of the transaction, however, senior leverage will be slightly higher than expected.

The $690 million term loan A and $100 million revolver remained at previous pricing levels of Libor plus 300 basis points.

The credit facility is expected to close next week.

JPMorgan, Bank of America, Deutsche Bank, Lehman Brothers and Wachovia Securities are the lead banks on the deal.

Proceeds will be used to help fund the leveraged buyout of the directory services company by The Carlyle Group and Welsh, Carson, Anderson & Stowe.

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