Moving the Market -- Tracking the Numbers / Outside Audit: SEC Is Slow to Approve Charter's Odd Stock Sale; Cable Operator Pays Penalty Under Terms of Note Deal Premised on Agency Nod
Wait, I thought you told the SEC.</br></br>Charter Communications Inc., the cable operator controlled by Microsoft co-founder Paul Allen, is hitting bumps with an unusual issue of new stock tied to its sale last November of $862.5 million in convertible notes. Charter isn't shouldering its burden alone. The investors who bought those notes are right there with it.</br></br>Selling the convertibles was a tall order to start with. The St. Louis company has more than $19 billion in debt, and bearish short sellers account for more than a third of Charter's publicly available stock. Ordinarily, hedge funds -- major buyers of convertibles -- would take a pass. These investors typically borrow a company's stock and short it as a hedge against owning the convertibles -- if the stock rises the convertibles become more valuable; should the stock fall, the short position pays off. But the huge short position in Charter stock makes it prohibitively expensive to borrow more of the stock to sell it short.</br></br>So Citigroup Global Markets Ltd., the underwriter of the convertibles, came up with a twist. The bank lined up investors for the notes and got Charter to promise to issue 150 million shares of new stock that would be lent to Citigroup. Citigroup would turn around and lend the stock to the note buyers, enabling them to replace the expensive stock they borrowed to short Charter and thus comfortably lock in their hedge against the 5.875% notes, which mature in November 2009 and can be converted into Charter shares should the stock hit $2.42. (Charter shares traded at $1.23, up one cent, in 4 p.m. Nasdaq Stock Market composite trading yesterday.)</br></br>Citigroup had a road map for doing this. Power giant Calpine Corp., another heavily indebted, heavily shorted company, last year sold $736 million in convertible notes tied to an issue of 89 million new shares. Calpine lent the shares to Deutsche Bank Securities, a banker on the deal, which lent them to hedge funds that bought the convertibles. The new stock issue wasn't dilutive because, under the terms of the deal, the shares will be returned to the company in 10 years when the convertibles reach maturity.