October 17, 2008

Uncharted Waters: Charter's Future Beyond '09 Still Unknown

Charter's viability compass appears to be rife with interference: US credit markets are severely constricted, the MSO's stock is careering toward its 2nd non-compliance notification from NASDAQ since Apr, and its balance sheet as of Jun 30 includes $20.5bln in debt and only $60mln in cash. Yet Charter investor relations dir Marty Richmond said the major market swoon of recent weeks hasn't materially impacted the MSO's previously stated plight: definite financial viability through '09, afterward unknown. "Charter's operations and businesses continue to perform well," said Richmond. "We do have time on our side." But as Charter faces a critical $1.9bln debt maturity in fall '10, the MSO hasn't addressed its outlook for that year's initial 2 quarters, forming an unknown gray area. Look for the discrepancy to be rectified during Charter's forthcoming 3Q earnings call, said Richmond, when execs will likely speak at "great length about the company's financial flexibility and liquidity." Possibly included in the discussion will be the MSO's share price, fresh off a historical low of 31 cents established Wed before rebounding Thurs to close at 38 cents. 6 more days of closure beneath $1 will mark non-compliance with Nasdaq's minimum bid requirement, giving Charter 6 months to exceed the $1 threshold or face delisting and further liquidity concerns. Richmond did say, however, that it's "reasonable" to speculate that, if needed, Nasdaq would grant Charter a 6-month extension and/or work to prevent a delisting because of the MSO's size and capitalization. Meanwhile, there continues to be concern in the multichannel industry that consumers' belt tightening may couple with tough credit markets to place heavy pressure on pay TV ops going forward. Accordingly, Sanford Bernstein analyst Craig Moffett slashed his price targets Wed on Comcast, Time Warner Cable and Cablevision, additionally noting that "for the most leveraged cable operators outside of our coverage universe [including Charter], credit scarcity could rapidly become a matter of survival; some may not make it through to the other side of the cycle." Of Standard & Poor's, Moody's and Fitch, only the former has a "negative" credit outlook assigned to Charter, although it raised its opinion on Charter this week to 'buy' from 'hold.' The price target was lowered to 50 cents from $1. "We're well aware of potential near-term financing challenges facing the cable industry's highest leveraged operator amid the credit crunch, but think government bailout of banks could indirectly rub off slightly on Charter, helping provide reassurance about near-term liquidity needs," wrote the firm. Said Moody's analyst Russell Solomon: "the market doesn't want Charter to fail" because there are so many owners of its debt. S&P is also heartened by the new employment contract for Charter pres/CEO Neil Smit ( Cfax, 10/1), who should soon have much to say about his company's future.