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The owner of Altice France, Billionaire Drahi, also considered a telecom tycoon, raised the possibility that bondholders may be forced to take larger-than-expected haircuts, increasing price volatility with bond valuations sharply lower. The news overshadowed progress on asset sales and debt refinancings, the weak results notwithstanding.

In summary:

• Altice France’s (SFR) 4Q23 results were overshadowed by the surprise announcement that bondholders may be forced to take haircuts. Credit valuation lost as much as 50%. The news that Altice’s data centers and Altice Media were being placed in the unrestricted group was also a surprise.
• The 4Q23 results were weak and not unexpected given the competitive pressures in the home market. While the group has made some progress on asset sales and debt refinancings, its financial situation remains weak. The founder, Patrick Drahi tried to reassure the market with “whatever it takes to deliver”.
• Following the earnings announcement, the market took notice that Altice needs to implement a more aggressive approach to achieve deleveraging. Therefore, bond prices will remain volatile and under pressure. According to Bloomberg, there are now bondholder groups exploring all avenues to protect their interests.

What happened exactly with Altice?

Back in August 2023, Altice struck a respectful deal when addressing bondholders financing the overindebted telecoms empire. The business was facing challenges on all sides: rising interest costs; weak operating performance; a corruption probe in Portugal. Drahi made an unusual personal appearance when Altice France SA, the core business, announced quarterly results and outlined plans to cut borrowings by selling assets and potentially buying back some of the debt where it was trading below fair value.

But last week, the tycoon came around with a far more aggressive plan — one that implicitly relied on a lot of bondholders being paid back less than their due. The change of tack saw Altice France’s bonds plummet. Drahi’s misstep was nowhere to be understood, but the market will remember this unfortunate turnaround.

At the center of all this is Altice France’s pessimistic assessment of the level of borrowings it can hold. Previously, the firm was trying to move forward with a net debt-to-profit ratio of around five times. Now it wants to get below four. The key issue here is that Altice shrinks with the sale of higher-quality assets and high-quality revenue streams. Consequently, the remaining business will have a lower overall borrowing capacity.

The new target implies a painful journey (for bondholders) to get indebtedness down. Net borrowings, accounting for recent asset sales, stand at €24 billion ($26 billion), a heady 6.4 times EBITDA. Guidance for this year’s performance was overdone, with EBITDA set to fall by a mid- to high-single-digit percentage.

As often when there are fire-sale-like transactions, those disposals aren’t creating the value the market was hoping for. Altice has compartmentalized sale proceeds so they don’t directly bring down the debt. Hence, the situation remains dire for the foreseeable future.

What is the lesson to be retained:

The company is unsustainable in its current and future form. Recent telecoms transactions in Europe have valued entire businesses at lower multiples. In the case of Altice, there are fragmented sales that require an additional discount. In other words, Altice France’s net leverage multiples are way too high given its profit margin.

So what about the bondholders? The new plan consists of a debt swap, the expected ratio is about 3 to 1. This plan though requires further adjustments and for the market, this results in some heavy-weight lifting – swallowing the medicine is hard to perform.

Any debt buyback proposals may therefore have to be accompanied by carrot-and-stick incentives. For example, might investors be invited to take a haircut on holdings in return for gaining seniority over fellow borrowers? Those who didn’t participate in the exchange would then rank lower in the pecking order in any bankruptcy.

Of course, this may simply be the start of a negotiated restructuring deal with creditors. Some borrowers were already coalescing into a group before last week’s bombshell, Bloomberg News reported. A classic negotiating tactic is to start with an extreme position and then “cede” ground on the road to an agreement. The fall in Altice’s bonds puts more pressure on holders to acquiesce to whatever debt exchange terms later emerge.

In 2025, the company has €1.3 billion falling due and Altice may probably make this cut with asset sales. But in 2027, the company needs to refinance a whopping €6 billion, and in 2028 close to €10 billion. A recent private placement raised €350 million at a nosebleed 11.5% rate.

The question now is how much Drahi’s creditors are willing to go along with the new dynamic, or whether they’d rather force a crisis, with the ultimate risk of pushing the company into default. Drahi’s calculation is presumably crude and sharp but may backfire in the future as “A Burnt Child Dreads the Fire”.