Altice USA faces significant financial challenges, with potential repercussions for both creditors and equity holders. The company is likely approaching a liability management exercise, raising concerns about its impact on stakeholders.
Two primary factors contribute to the high downside risk for Altice USA’s equity: the capital structure and bond prices, and potential conflicts with organized creditors.
Potential Liability Management Exercise
In a recent earnings call, Altice USA’s management hinted at possible balance sheet maneuvers, causing bond prices to drop significantly. This signals an impending liability management exercise that could negatively impact creditors and, consequently, equity holders.
The exercise could take the form of a distressed exchange offer or an up-tiering transaction, with the former being more likely due to the need for new funding for the latter.
Impact on Equity Holders
Creditors are prioritized over equity holders in the event of financial distress. If creditors lose principal in any exchange, equity holders are at risk. Recently, creditors across various tranches have organized with legal counsel to prepare for potential balance sheet actions by Altice USA.
This group of sophisticated investors is ready to fight back against the company’s decisions, potentially through legal action or renegotiating waivers that could lead to a significant equity raise.
High Leverage and Its Implications
Altice USA’s leverage is a major concern, with the company’s debt levels high enough to threaten equity holders in any restructuring scenario. An analysis of Altice’s capitalization table, provided by CreditSights, highlights the division of debt between two main subsidiaries: CSC Holdings and Lightpath.
The senior secured debt leverage ratio is at 5.3x, while the unsecured debt stands at 7.1x.
Case 1: Bond Prices Reflect Recovery Value
Based on current bond prices, the 45-cent price of the Senior Unsecured notes implies a fair value of around $2.7 billion from over $5.5 billion of total unsecured debt. Adding this to the face value of the secured debt and dividing by CSC’s EBITDA results in a multiple of 6.1x.
Under this scenario, equity cannot be assigned any positive value as creditors are significantly impaired.
Case 2: Valuation Using Public Comparables
A set of six public comparables, differing in size and geographical location, was used to derive a fair market value. The average multiple aligns with the previous approach at 6.1x, indicating that equity holders would again receive zero recoveries, with unsecured creditors deeply impaired.
Risk of Shorting Altice USA’s Equity
Despite theoretical predictions, equity in distressed companies sometimes retains value due to convexity priced in, which represents the probability of positive developments before debt maturity. For Altice USA, this optionality is valued at $1 billion.
However, the risk of shorting the equity lies in potential positive outcomes, such as EBITDA growth or expanding valuation multiples.
EBITDA Trends
Historical EBITDA data shows a persistent decline over the past two years, reflecting a struggling business. This decline lowers the risk of unexpected positive developments for short sellers.
Altice USA’s historically high EV/EBITDA multiple has compressed over time towards the industry average, yet remains the highest among its peers. This leaves little room for further improvement, even if the industry experiences overall growth. The current market valuation, influenced by the significant stake held by founder Patrick Drahi, seems overly optimistic.
However, creditors will likely take measures to limit their losses, negatively impacting equity holders.
Risks Ahead for Equity Holders
Altice USA’s financial situation, characterized by high leverage and potential liability management exercises, poses significant risks to equity holders. The market appears to overestimate the chances of equity recovery, given the high downside risk attached to its valuation framework.
Investors should approach Altice USA with caution, considering the potential for serious downside risk as the market reassesses the convexity priced into the equity.
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