How Debt Backfired on Europe's King of Leverage: QuickTake Q&A

(Bloomberg) -- Markets are starting to test the mettle of the global telecom provider Altice NV and its billionaire founder, Patrick Drahi. Created in 2001 in the aftermath of the dot-com crisis, Altice grew into Europe’s biggest issuer of junk debt as it made acquisitions around the globe. It’s lost almost 60 percent of its market capitalization in the last month and investors are weighing whether Drahi and his management team will be able to cut or grow their way to better health.

1. Why are investors worried?

The Amsterdam-based company narrowed its profit outlook to the lower end of a previous forecast last month, citing weak trading at its French unit, which contributes about half of the group’s revenues. That unit includes the second-largest French phone company, SFR, which in 2014 was bought and then merged with cable company Numericable.

2. Why is France such a challenge?

Intense competition and a slowly implemented cost-cutting plan have left the French unit burning cash, according to Bloomberg Intelligence analyst Stephen Flynn. The French business’s dismal performance triggered a crisis of confidence among investors wondering whether Altice’s assets can support such high leverage, according to Henry Craik-White, a portfolio manager at ECM Asset Management.

3. How did Altice get so highly leveraged?

Drahi, a French and Israeli citizen with an estimated net worth of $5.2 billion, pulled off a series of debt-fueled acquisitions in places including Belgium, Mauritius, Israel, Portugal and the Dominican Republic. In 2014, with Europe recovering from its sovereign debt crisis, Drahi managed to raise more than $20 billion in bonds and loans as part of his purchase of SFR, which then was Vivendi SA’s French phone unit. His successful bid included a heavy reliance on covenant-light loans, a type of debt that sidesteps some of the traditional requirements used by lenders to keep a borrower in check. Since then, Altice has relied on debt to make its first forays into the U.S., with takeovers of Suddenlink Communications and Cablevision, and to expand in Portugal.

4. How much debt are we talking about?

Altice’s current net debt load is about 50 billion euros ($59 billion). Its annual interest bill is about 3.1 billion euros, according to calculations by Bloomberg Intelligence analysts.

5. Can Altice handle its debt load?

The company can manage its interest and faces no large principal payments until 2022. It pushed 19 billion euros of debt maturities to after 2025 following a series of refinancings. It’s still paying coupons of more than 7 percent on some of the junior bonds that helped finance its mergers, which the company may not be able to refinance more cheaply anytime soon. Tighter U.S. and European monetary policy may hurt Drahi’s strategy of chalking up deal after deal using cheap debt.

6. What are Altice’s options now?

Barring a faster-than-expected turnaround of business in France, the company may shed assets to cut its indebtedness. Its stated goal is to bring its European net debt down to four times its earnings before interest, taxes, depreciation, and amortization, from about 5.1 times now. News of the first of what could be 6 billion euros worth of asset sales on Dec. 1 helped reverse the longest slump in the company’s 2022 notes since September. The company also shook up its management.

7. Are creditors worried?

Bondholders and lenders took notice of the collapse in share price but aren’t all rushing to the exits, at least yet. Creditors are repricing the risk of holding Altice’s debt. Some of the company’s bonds fell as investors bet the company won’t be able to redeem their obligations early, and the cost of credit-default swaps insuring debt issued by its Altice Finco and Luxembourg units rose to an 18-month high. With most of its debt trading near face value there are no major doubts about its sustainability, although some concerns are starting to creep in, said Mark Chapman, an analyst at CreditSights in London.

The Reference Shelf

• Altice’s hoped-for rebound in France could take a year or more.
• Drahi’s listing in the Bloomberg Billionaires Index.
• Altice needs to go on a stricter debt diet, writes Bloomberg Gadfly columnist Lionel Laurent.

©2017 Bloomberg L.P.