The story of the restructuring of Cablecom

A case study in successful cooperation between private equity and distressed lenders by Louis Kenna, Managing Director, Media & Telecom Finance, BNP Paribas.

Telecom Finance, Issue 129 - Published 23, November 2005. Reprinted with permission

Cablecom is the leading provider of cable TV services in Switzerland with 1.5 million analog television subscribers. It is widely perceived as being one of the most attractive cable TV assets in Europe. Over the last 5 years it has had an extraordinary track record in the capital markets. In 2000 Cablecom achieved leverage of over 20x leading to significant write-offs for its lending banks. Apollo, Goldman Sachs and TowerBrook Capital Partners (formerly known as Soros Private Equity Partners) bought a significant stake in the business alongside the banks and took control. It then went to be sold to UPC late last month and in the end banks which had not sold out during the process recovered their losses. It is a story of an unusual and initially uncomfortable cooperation between distressed lenders and private equity which eventually led to a positive result.

The trouble starts

On 7 January 2002 a group of 8 banks were called together for an urgent meeting at JP Morgan's offices in the City of London. Representatives of these banks were formed into the Cablecom Steering Committee. It was to be the first of a series of weekly meetings that went on for almost 2 years. This was the point at which continued rumours of troubles at the NTL Group (which included Cablecom) were confirmed. NTL's lead banks were informed that an offer from a core group of NTL bondholders was imminent.

Almost 18 months earlier at the peak of the telecom financing boom, a bank syndicate had provided debt facilities to Cablecom totalling CHF4.1bn (Euro2.7bn) representing more than 20x leverage. The debt had syndicated successfully. This was to some extent due to an understanding that if there were ever a problem at Cablecom, banks could look to its 100% parent company, NTL, to make up the shortfall. Virtually all the Cablecom lending banks were also NTL lending banks.

Cast off to NTL Europe

The NTL bondholder group had agreed with NTL banks on a Plan of Reorganisation in April 2002. They were prepared to equitise their $11bn bond position in NTL and recognise the NTL (UK) bank debt in full. However, they would only do this on the basis that Cablecom and all of NTL's other mainland European projects were spun out into a new vehicle to be named NTL Europe. The effect of this move would be to remove all possibility of Cablecom lenders seeking recourse to NTL for any losses.

There was strong objection to this plan amongst the Cablecom banks but in the end the alternatives involving aggressive action against NTL in the UK were even less palatable. The NTL banks acceded to the bondholder request. The Cablecom banks started their relationship with NTL Europe. This was a holding company owned by a sub-set of the original NTL Inc bondholders. NTL Europe was managed by former senior NTL employees who had been hired after the Cablecom acquisition.

In early 2002 it also became clear that Cablecom was over-indebted under Swiss Law. Its debt burden appeared to exceed the likely value of the Company and, as such, Cablecom's auditors were going to have trouble signing off the annual accounts. Sentiment in the debt and equity capital markets was very negative at this time and the prevailing view in the market was that the Cablecom lenders were in effect the owners of Cablecom. However, at this time there had been no debt for equity swap and the banker / borrower relationship was still in effect with final repayment due in March 2010.

The clock starts ticking

The over-indebtedness issue meant that Cablecom had to seek a waiver from lenders to avoid the risk of insolvency. The banks agreed to a series of waivers and allowed Cablecom flexibility to draw an additional CHF180m of debt. At the same time they introduced a condition requiring all Cablecom debt to be prepaid within 12 months (with a 6 month extension allowed subject to a further waiver from the bank group). All other undrawn debt facilities were cancelled such that the outstanding drawn debt stood at CHF3.8bn. The Cablecom bank group was now fully focused on a sale of the business.

At this point an investment bank was hired to review the valuation of Cablecom. The results of the exercise confirmed the banks' fears as it became clear that in the depressed market conditions achieving a price that went anywhere near repaying the debt was extremely unlikely. While there was sporadic interest from some strategic buyers, it was clear that it was going to be difficult for Cablecom to pull together enough interest to run any form of real competitive auction process.

Banks start to rush for the exit

The bank group started to divide in its thinking. Some banks recognised the long term value of the asset and took the view that they were happy to hold on to the loan. Others took the view that prospects for Cablecom were less rosy and that it was time to start thinking about an exit. By Q1 2003 the bank debt was trading down towards 50 cents on the CHF. Virtually all banks had taken some level of provision on their positions.

To the extent that a bank had written its debt down aggressively, say to 40 cents on the CHF, and had the opportunity to realise a gain by selling their debt into the secondary market at a price above this, then this became a serious consideration. The more trading oriented US investment banks generally seemed to be the most inclined to sell while the European commercial banks as a group were more prepared to take a long term view. There were exceptions. In any event the exodus was gathering momentum.

Banks seek to take ownership

The idea of a sale of the whole business had now been discounted. The Steering Committee had spent much of 2002 and early 2003 working on the terms of a debt for equity swap. The aim was for the banks to write-off a portion of their debt (taking equity in return) thus reducing Cablecom's debt to a level which Cablecom could support. At the same time the banks were keen to write off as little as possible.

A 100% approval would be required from lenders to a package prepared by the Steering Committee. The package would need to address the amount of debt to be equitised and the terms on which the banks as shareholders would co-exist. The package was issued by the Steering Committee to the bank group for a vote in March 2003.

The consortium enters the story

The Steering Committee was counting in the votes later in the same month when it became clear that amongst the new holders of Cablecom debt were some unusual players. These included Apollo, Goldman Sachs and TowerBrook. In each case these financial sponsors were not constrained by the usual private equity LP limitation that prevents buying debt securities. This put them in a very strong position to act where many of their peers could not.

The 100% approval hurdle dictated by the bank documentation meant that even with 1% of the debt any new lender could veto the package put forward by the Steering Committee. As it was, the private equity players had very quickly reached an ownership level of almost 10%. They were continuing to buy in the market and it seemed unlikely that they would agree with at least one of the provisions of the Steering Committee package which required that no shareholder would hold more than 20% of the equity of Cablecom. While Apollo, Goldman Sachs and TowerBrook had started buying on an individual basis, they formed a Consortium within a short time frame.

The bank Steering Committee met with the Consortium on the Easter weekend of 29 April 2003. It was clear that there were differences of opinion between the two sides on a range of issues from management of the Company through to structure of the new debt package.

By this time it appeared that the Consortium owned about 30% of the debt and therefore had a commanding position.

Differences of perspective

Essentially, the Consortium's view was that they were forming a new LBO style company that they would control with the banks as passive shareholders. The Steering Committee's starting point was that this was a distressed company that should be managed by caretaker bank committee along the lines of a typical work-out with a view to finding a buyer at the earliest possible real opportunity. Essentially, Financial Sponsors were meeting banks' distressed debt teams who had already mentally written off millions and, understandably, there was not an immediate meeting of minds. The presence of some cross-over bankers who dealt with both distressed debt situation as well as LBO origination helped the two sides to start to find common ground.

In the background the sword of Damocles dangled. The over indebtedness issue had re-emerged given that 12 months had passed since the last waiver. Unless an agreement was reached within days there was a risk of insolvency. In the event of insolvency there was a significant risk that a receiver would have to be appointed in every canton in which Cablecom operated - which amounted to dozens. With this arrangement it was likely to take years for Cablecom to re-establish itself and it would have been very difficult to arrange for the sale of Cablecom as a whole business.

The nerves of the remaining lending banks were being tested to the full and this was reflected in discussions with the Consortium. There were reports of trades in the bank debt at 40 per cent of face value and below. Even Steering Committee banks were starting to exit.

The greatest risk at this stage was being taken by the Board of Cablecom. They were liable to be sued if no resolution was ultimately achieved. All sides therefore agreed to indemnify the Directors so as to allow an extended window during which negotiations could continue. In the end the Consortium and Steering Committee agreed together to grant the 6 month extension to Cablecom. They also agreed a high level set of terms which they intended to negotiate during that time window.

Resolution reached

Resolution on the debt structure was reached relatively quickly with the banks agreeing to a longer term more LBO style package. During the debt discussions roles were reversed as the banks argued for more debt to remain on the Company (so that they could limit their write-off) while the Consortium tried to force the debt amount down to enhance the level of implied equity and to ensure Cablecom would come out of restructuring with a "Market Type" capital structure. The level of debt was finally agreed at CHF1.7bn representing a write off of CHF2.1bn in total, equivalent to 55% of the initial drawn loan.

Governance issues took longer to resolve. A particular concern of the banks was that by this stage the Consortium still did not own a majority of the debt, only about 38%. An innovative solution was found to the ownership issue: the Consortium agreed to acquire the shares of NTL Europe, which was controlled by the previous NTL bondholders. These shares should have had no value given the over-indebtedness situation. However, NTL Europe did have the ability to significantly disrupt proceedings and, as such there was perceived to be a value attaching to removing them from the equation.

The Consortium proposed that the NTL Europe shares only represent 3.5% of the economic value of the new Cablecom but have voting rights attaching to them of 12.5%, thus taking the Consortium to a control position on a voting basis. In the event that the value of Cablecom went above a certain target level the Consortium would benefit from the full 12.5% value for the incremental uplift. The banks appreciated the fact that this gave the Consortium a disproportionate incentive to achieve a higher sale price.

Shareholder voting structures were agreed with the hurdle generally set at 75%. The Consortium were not allowed to buy above a certain level without bidding for the whole Company and a drag and tag structure was agreed to manage the position of minority shareholders, which the banks expected to become in due course. Anti-dilution measures were agreed with minority shareholders that provided the right to subscribe for any new equity.

A new Board was formed made up of nine non-executive directors: three proposed by the Consortium, three by the banks and three independents (to be proposed by the Consortium and ratified by the banks). As well as Consortium members the Board included a number of distinguished industry players including Peter Manning, former CEO of Colt Telecom, Rolf Watter, a leading Swiss lawyer, and Nicholas Mearing-Smith, founder of Britannia Cable in the UK.

Cablecom formally exited restructuring on 12 November 2003. It is notable that revenues and EBITDA had increased by 17% and 40% respectively from 2001, the year prior to restructuring, to 2003, the year in which it exited restructuring. Capex had at the same time been cut from CHF375m per annum (over 65% of revenues) to CHF176m per annum (circa 27% of revenues).

The consortium and management take the lead

Within weeks of coming out of restructuring the Consortium was focused on how to re-establish Cablecom with the principal questions relating, firstly, to management and, secondly, to the company's Voice over IP project. It became clear very quickly that the new management team under the leadership of the CEO, Bruno Claude, and the COO, Rudi Fischer, was proving quite effective. Approval was sought from shareholders for up to 10% of Cablecom's equity to be offered up to management in the form of a co-investment incentive scheme. The Consortium brought to the table significant experience from past telecoms and cable investments as well as added other senior executives to both the board and to the management line up to enhance the depth of expertise.

The question of whether or not to launch voice was a more challenging one. Within weeks of Bruno joining in 2001 the original telephony project was put on hold until the company and the technology were ready. The project was then started over again with the hiring of a new management team with the necessary experience to turn around the operations, develop the long-term strategy and launch new products. Previous Cablecom management had spent millions on launching telephony based on unproven technology that never materialised. Nonetheless, the combination of Cablecom's wide reaching cable TV platform (extending into over 50% of Swiss homes) and the attractive pricing characteristics of the Swiss market made this a compelling move. Telephony was gradually offered up to the market through a series of soft launches.

With the telephony project moving forward, attention turned to the financing. After a competitive process run in Q1 2004 Cablecom's debt was refinanced with a deal that reduced the Company's annual interest cost by 50% and extended the debt maturity by over 3 years while reducing the number of covenants.

The other immediate operational performance issues to be addressed included the launch of the Digital TV platform and Business-to-Business data and voice services. In addition, Cablecom significantly accelerated the growth of its broadband Internet and telephony businesses through the first and most successful large scale commercial launch of Voice over IP in Europe on a large scale basis. The decision to launch and accelerate the rollout of telephony turned out to be the right call for the company and its shareholders in terms of value creation.

During 2004 / 2005 Cablecom approached the regulator with a revised request to increase the analogue TV rate. For the first time since the late '90s they were successful in arguing the case, adding yet further momentum to the positive momentum of the business.

By early 2005 the level of success of the telephony project was becoming clear. With this success came a requirement for more debt covenant flexibility. Cablecom went back to the debt markets again in early 2005. This time they were the first company in Europe to raise 100% financing with capital markets intstruments (i.e. bonds) and completely remove bank debt from its capital structure. This not only allowed for a reduction in the number of covenants but also achieved a further back-ending in the debt maturity profile and further reduced the Company's interest cost.

The exit

With the equity markets recovering, Cablecom started work in mid 2005 on an exit through IPO. The IPO was formally launched and was moving forward very well. However, Liberty made a last minute bid on 29 September confirming its desire to buy Cablecom for a price of CHF4.4bn. While this was at the low end of the IPO value range, it gave certainty and allowed for a 100% exit by the existing shareholder group. This had some attraction to the controlling shareholders of Cablecom and allowed them to fully capitalise on the strong growth achieved in the company.

This latest move is a very positive one for Cablecom bringing with it access to Liberty's depth of management expertise in cable operations as well as its access to content.

Conclusions

Cablecom was always a great company. It got into difficulties because it was too highly leveraged; in 4 years management doubled EBITDA, increased cashflow by more than CHF325m and RGUs by more than 50%;
Apollo, Goldman Sachs and TowerBrook demonstrated through the Cablecom process their ability to put a major company back on its feet by making key decisions as well as supporting and enhancing an effective management team;
all those lending banks that exited when the Consortium became involved with Cablecom wrote off approximately half their debt and were never able to recoup that lost value; and
those banks that decided to ride out the situation alongside the Consortium got paid their debt back in full and had the opportunity to bid for a number of attractive debt and equity mandates in the mean time.

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