After years of debt-fuelled expansion, Altice divided itself in three. Since 2018 the American arm of the telecoms empire has stood alone. Under a web of Luxembourg-based entities sit Altice France, which owns SFR, its country’s second-largest operator, and Altice International, with businesses in Portugal, Israel and the Dominican Republic. Each part has struggled with a huge debt load while remaining under the control of a shareholder whose approach to debt is singularly ruthless: borrow as much as possible, then squeeze the lenders. Lately creditors have been wrung out even further.
Patrick Drahi is a child of Morocco and an alumnus of Polytechnique, the engineering school that manufactures France’s elite. His business education, though, was American. In 1999 he began working for John Malone, a cable tycoon. A few years later when Mr Drahi started Altice he took Mr Malone’s cost-cutting, debt-loving ways with him. During a furious acquisition streak Altice’s debt grew from €2.2bn ($2.6bn) in 2013 to €50bn in 2017. Interest rates were low and investors desperate to lend. Covenants, the clauses in lending documents which limit borrowers’ ability to take on extra debt or shift assets, were loosened or disappeared altogether.
When Altice France began restructuring its debt last year, Mr Drahi thus held all the cards. When a firm borrows, some of its subsidiaries are “restricted”, meaning they are bound by the covenants agreed with lenders. Others are not. Changing a subsidiary from one to the other is tightly controlled. In this case, not tightly enough. Mr Drahi was able to declare parts of Altice France “unrestricted” and thus beyond the reach of lenders. By October, when the restructuring was complete, Altice France’s lenders were owed €17bn rather than the original €24bn, and got 45% of the firm’s equity. Not only had Mr Drahi survived the debt write-down. He had managed to retain control.
He couldn’t do it again—could he? On November 28th Mr Drahi pulled an even more aggressive stunt at Altice International. Operations in Portugal and the Dominican Republic were declared “unrestricted”. The previous week lenders had held €8.8bn of loans and bonds backed by €1.5bn of annual operating profit before depreciation and amortisation, already a punchy leverage ratio. They returned after the weekend clinging to just €300m of profits from the Israeli subsidiary, resulting in a comical ratio of 27. Mr Drahi also borrowed a further €750m against the newly liberated operation in Portugal.
In response to such tactics, the masters of the universe are unionising. Credit funds sometimes sign “co-operation agreements” to negotiate with companies collectively. But Mr Drahi has it in for those. On November 25th he sued lenders to Altice’s American operation, recently renamed “Optimum”, for agreeing not to lend to it while they negotiate. The argument is that co-operation violates antitrust laws and raises the cost of Altice’s debt.
Where will it all end for Mr Drahi’s lenders? The best hope for creditors to Altice France is a sale of SFR. A deal with a competitor would see debt repaid around par, provided regulators want telecoms consolidation as much as they say they do. The prospects for lenders to Altice International are gloomier. Those to the American arm now depend partly on a court in New York, which will adjudicate on Mr Drahi’s lawsuit against their co-operation.
Fights like the one at Altice are becoming more common. “Liability management” deals—dicey restructurings outside bankruptcy courts, such as those at Altice—are booming, enabled by weak covenants. An industry of bankers and lawyers is getting rich based on the resulting gamesmanship. They, at least, expect to be paid in full. ■
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