Charter seeks to cut debt

Charter Communications Inc. on Friday filed for a prearranged Chapter 11 bankruptcy to get relief from its creditors, as the nation’s fourth-largest cable operator strives to keep its head above water and still compete with phone companies and satellite TV providers.

The St. Louis, Mo., company seeks to emerge from bankruptcy as early as the end of summer and doesn’t plan on selling any of its assets to competitors. After Chapter 11, interest costs at Charter, which has never posted a profit since going public in 1999 because of massive debt interest payments, will be cut in half to $830 million a year.

The filing restructures about $8 billion of debt at Charter, which is controlled by Microsoft Corp. co-founder Paul Allen, but leaves about $13 billion of debt on its books. Allen will control 35% of the votes in the reorganized company.

In the bankruptcy, Allen’s 51% equity stake in the cable operator will be wiped out, along with shares of other stockholders.

Charter filed a prearranged bankruptcy, which has the support of major bondholders. The rest of the creditors will be dealt with through Bankruptcy Court.

The cable operator racked up massive amounts of debt as it grew through acquiring cable systems. For years the company has ducked insolvency, but it is now coming up against tight credit and billions of dollars of debt coming due.

On Friday, Fitch Ratings downgraded its issuer default rating on Charter and its subsidiaries to D -- its lowest rating and an indicator of bankruptcy -- from C. The rating measures Charter’s vulnerability to defaulting on its debt. Fitch also affirmed certain senior unsecured, senior secured and convertible senior debt.

It also raised its rating on some credit facilities because of definition changes at Fitch unrelated to the bankruptcy. The actions affect $21.7 billion of debt.

Although the bankruptcy provides relief, it remains to be seen whether Charter can finally post a profit with a smaller debt load during a recession.

“That’s the question,” said Matt Dundon, an analyst at Miller Tabak Roberts Securities. “It really depends on what your expectations are of the development of cash flow in the business.”

Charter is bullish: It expects to post free cash flow of $500 million in 2010.

Shares of Charter fell by half a cent, or 15%, to 3 cents Friday.