Altice France’s billionaire owner is trying to reshape the natural financial order: Chris Hughes

In a financial landscape where the balance of power between bondholders and stock investors is shifting, Altice France emerges as a battleground for creditor rights. Founder Patrick Drahi's manoeuvring to reduce the telecom giant's staggering debt load has sparked controversy, pitting debtholders against equity interests. With the market pricing in substantial losses for bondholders, the saga underscores the complexities of corporate finance and the delicate dance between leverage reduction and shareholder value..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..By Chris Hughes.You used to be able to count on bondholders getting better treatment than stock investors when companies hit the skids. Not so much anymore. .___STEADY_PAYWALL___.Telecoms firm Altice France is trying to force losses on creditors in a way that could create gains for billionaire founder and owner Patrick Drahi. Little more than a year after the controversial rescue of Credit Suisse, where some bondholders got wiped out while the bank's shareholders retained a stake, the convention that says debtholders come before equity investors is again being tested..Both situations turn on the details of the contractual relationship between company and borrower. But whereas the holders of the Swiss bank's risky debt — so-called AT1s — can reasonably argue the small print that was used to justify their treatment was ambiguous, Altice France's bondholders have no such defense..Battle commenced last month when managers of Drahi's core French business said the company needed to reduce its €24 billion ($26 billion) of net borrowings more rapidly than previously flagged. The main way of doing this would be "discounted transactions" — in other words, creditors selling or swapping their debt at less than face value..Some €10 billion of debt reduction is necessary to hit Altice France's newly reduced debt targets. Couldn't asset sales do the heavy lifting? Around €2 billion of disposals have been agreed to so far, with more possible. To incentivize investors to go along with its strategy, Altice France said sale proceeds will be used to reduce leverage only after creditors have themselves accepted haircuts. The defining weakness of the debt's contractual terms is the discretion Drahi has to move assets in and out of the basket backing it. So he can play hardball..Read more: 🔒 Real estate turmoil: $1.2 Trillion loss sparks concerns for smaller banks.The market quickly concluded Altice France could pretty much get its way, and priced in hits to the two main classes of debt securities. Bloomberg Intelligence estimated a requirement for a 25% to 40% snip to the "senior secured notes," which account for €20 billion of the total, and a 70% hit on the "senior notes," which are subordinate. Recent prices envisage burden-sharing roughly in these proportions..True, a large number of the senior secured noteholders have united into a group, with holdings in the subordinated debt too. Its lawyers devised a six-month cooperation agreement, Bloomberg News reported on April 12. United factions make it harder for Drahi to divide and conquer the debtholders by striking individual deals to his advantage..But truly aggressive resistance from creditors would involve gambling on a more formal process that could see the senior secured noteholders exchange part of their holdings for an equity stake. The likely reality is that a lot of them won't be in the business of owning chunks of distressed companies, making this an unappealing course for them. What's more, Drahi can dangle the carrot of providing more security to their debt if they tag along with his informal plan. If anything, the large unified group poses a threat to an existing separate smaller coalition of investors who are exposed more to the subordinated debt — the ones currently in line for the worst hit..Read more: 🔒 Matthew Brooker: How small shareholders can cause good trouble.So the broad market reaction rationally reflects the power dynamics. But that shouldn't distract from the irrationality of the economics..Debt expert CreditSights conducted a sum-of-the-parts analysis of Altice France showing that, on reasonable assumptions, total assets are broadly worth the borrowings. Cutting debt then creates equity for Drahi. As Bloomberg Intelligence puts it, the leverage reduction plan could create €4 to €5 billion of equity "where today none exists.".The drama here is forcing investors to think about worst-case scenarios. Altice France operates in a viciously competitive market. Telecom revenue fell 1.3% in 2023, with profit (as measured by earnings before interest, tax, depreciation and amortization) down 4.5%. On top of saying its current leverage is far too high, the company has also given bearish short-term profit guidance. Leverage will therefore tick higher still if debt isn't cut. Management is working on a turnaround but that's far from done. The current ambiguity over Altice France's future value helps create space for a deal to trim borrowings..Asset sales got off to a good start, and the debt was trading up before Altice France's March bombshell (although that would, ironically, have made an earlier plan to do voluntary debt buybacks less beneficial). It's not entirely naive to believe in the alternative scenario where the company just muddles through without haircutting the debt. As CreditSights points out, a united front pushing for just such slow-and-steady leverage reduction — as the company outlined last year — would "in principle" be "attractive for all creditors.".The noteholders here should get at least some quid pro quo. One obvious concession would be that the terms of new securities they receive in any debt swaps show a much more even — and normal — balance of power between shareholders and lenders..Read also:.Renergen CEO Marani to 45 000 shareholders – Forget the noise, $1bn project the real story🔒Meet Dr Marc Liebscher, the German White Knight riding to rescue of Steinhoff's retail shareholdersEvery dark cloud has a silver lining; will Telkom shareholders find theirs?

Altice France’s billionaire owner is trying to reshape the natural financial order: Chris Hughes

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