ANALYSIS-Allen's Charter Comms may run afoul of lawsuits

Wed Apr 1, 2009 9:20pm BST

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* Charter bankruptcy plan could be delayed by debtor suit

* Charter and Paul Allen being sued for fraud by fund

By Yinka Adegoke

NEW YORK, April 1 (Reuters) - Charter Communications' (CHTR.O) bankruptcy process could be derailed by lawsuits claiming loan agreement violations.

Charter, the cable TV operator controlled by Microsoft (MSFT.O) co-founder Paul Allen, filed for bankruptcy last week, buckling under the weight of $21.7 billion in debt. [nN27544168]

Now, the once acquisitive cable firm is being sued by JPMorgan (JPM.N), on behalf of itself and other holders of $8.5 billion in senior debt, saying the cable company defaulted on debt because of a change of control.

Four sources familiar with Charter's reorganization talks told Reuters that JPMorgan's suit could delay or even derail the bankruptcy process.

Under Charter's proposed restructuring plan, Allen will keep a 35 percent controlling, voting stake in Charter but his equity stake would be reduced to 7 percent. As of Dec. 31, 2008, Allen had had a 91 percent controlling stake through his Class B common stock, and a 49 percent common equity stake.

The central question is whether the reduction of Allen's equity stake constitutes a change of control, even though he continues to hold a controlling voting stake.

Charter's reorganization had been structured to ensure that Allen retained a measure of control specifically to avoid triggering a "change-of-control" covenant, a clause specifically mentioned in JPMorgan's debt deal, according to three people familiar with the bankruptcy plan negotiations.

But JPMorgan argues that the drastic reduction in Allen's stake had eroded control by the former software guru by dramatically reducing his influence.

"This is an attempt to delay the process for as long as possible to see if they can squeeze more money out of the company for themselves," said a person close to the talks but not authorized to speak publicly on the terms.

Executives have stressed repeatedly the need to get through its bankruptcy and restructuring rapidly, to give the operator a better shot at turning itself around.

Charter argues that Allen remains the single largest shareholder and thus retains control.

"Effectively, Paul Allen still has the largest controlling stake so this plan still satisfies the covenants," said one of the three people.

NEW DEBT?

Should JPMorgan's suit prevail, sources say Charter may be forced to issue debt.

The existing plan intends to "reinstate" around $11.8 billion in debt with existing terms untouched. But lawyers for JPMorgan argue that the terms should no longer stand, because Charter's risk profile had altered with a "change of control."

JP Morgan's move is typical of a senior creditor determined to "vindicate its rights to the fullest extent possible," according to Anthony Sabino, a law professor at St John's University and a Chapter 11 specialist at Sabino & Sabino.

Any attempt by Charter to raise new debt in the current weak credit environment would be extremely difficult, said Sabino and another bankruptcy specialist who asked not to be named. It would also potentially further raise Charter's hefty interest expense burden -- one of the key reasons the cable company has been bleeding money for many years.

"It would be make it much more difficult for the company to operate," another source said.

Under Charter's existing bankruptcy plan, the company raised about $3.5 billion of capital and debt financing, which included $2 billion in equity, refinancing about $1.2 billion in senior debt and raising $267 million in new debt.

The plan is also designed to cancel $8 billion of debt and reduce Charter's annual interest expense by more than $830 million.

"The salient point (for a bankruptcy judge) will be just how viable Charter will be and how much of its debt it will be able to repay in this troubled economy," said Sabino.

Charter and Allen are also being sued for securities fraud by Key Colony Fund, a senior bondholder based in Little Rock, Arkansas.

Key Colony's suit alleges that Charter and Allen were "engaged in a scheme to defraud the noteholders of Charter" by making public statements claiming Charter's business was growing and had sufficient cash through the year 2009 to meet its debt obligations.

As of March 27, Charter had around $700 million in cash on its balance sheet. It said in November its next major maturity was for $1.9 billion in September 2010.

It was not immediately clear from Key Colony's lawsuit how much debt it owns, but the fund said the prepackaged bankruptcy caused a "substantial economic loss." The fund's lawyers were not immediately available to comment.

(Reporting by Yinka Adegoke; Editing by Gary Hill)

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