A step in the right direction

After agreeing to a proposed £3.5 billion debt-for-equity swap in July, bondholders in Telewest have approved the final terms of a deal that will take the company closer to emerging from bankruptcy

The long-running saga of Telewest’s restructuring took another step forward last month when the cable company reached an agreement with a group of creditors. Under the terms of the plan, Telewest bondholders will now receive 98.5% of the company, leaving shareholders with the remaining 1.5%.

This is a marked improvement for the ad hoc group of bondholders, which includes WR Huff Asset Management, Liberty Media Group and IDT Corporation, who had agreed in principle in September 2002 to receiving 97% of the firm. But some hard bargaining from hedge fund manager William Huff – owner of 15% of Telewest bonds – upped the share after he complained that the 3% allocation to shareholders was too high.

And it makes perfect sense for the bondholders to squeeze as much juice out of the company as possible, as each percentage point is estimated to be worth about £10 million. This would go some way to compensating them for their investment in the company, as the bonds are trading at around 43% of face value.

After last month’s announcement, bids on Telewest’s 2010 sterling bonds nudged up 50bp on the day to 42.75% of face value, eight points higher than in July, say traders. In contrast, Telewest shares crept down 0.8% to 2.5 pence.

For John Malone of Liberty Media, which holds 25% of the company’s equity, the revised plan could still provide some upside despite Liberty seeing its equity value nose-diving. Malone holds 11% of the bonds, so he can take some comfort from the fact that Liberty Media is receiving a better deal as a bondholder by gaining a larger share of the company.

Although the restructuring saga is still rumbling on, some analysts are speculating on the role Huff and Malone will play in the future company. Analysts view a merger with NTL as a likely scenario and this would be in Huff’s favour as he is chairman of NTL.

But Malone could also strengthen his position as he tries to step up his involvement in the European cable industry. Both NTL and Telewest will require an injection of capital and some analysts have speculated that Malone could be one possible provider of financing.

Although Huff’s persistence in achieving the best terms possible has paid dividends, Telewest’s road back to recovery has another obstacle to overcome – the company’s lending banks.

The cable company still has to come to an agreement to roll over the £2 billion it owes the banks into a new overdraft facility. Although negotiations have been continuing for over a year, it could be months before a resolution is reached with the banks.

One sticking point for the banking community is Telewest’s proposal to transfer its listing in the UK to a listing on the Nasdaq stock market in the US. The creditor banks are concerned that if the company experiences financial troubles in the future, they could lose out under US bankruptcy laws.

This is because under Chapter 11, lending banks and creditors are offered less protection in the US. The structure of Chapter 11 legislation means that securing the future of a company is the first priority rather than protecting creditors’ interests.