Finance

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Billionaire Patrick Drahi never sits still. This week, it's not another blockbuster acquisition -- although Altice NV, his transatlantic telecoms company, did just buy a promising little web advertising start-up. No, this time Drahi has been on the prowl on the credit markets, refinancing a chunk of his 50 billion-euro ($54 billion) debt mountain.

The move is part of Altice's continuing effort to extend maturities and lower the cost of its debt, which was built up since 2014 in a rapid-fire series of acquisitions in the U.S. and Europe. Altice refinanced some bonds and loans held by its U.S. cable businesses last week, replacing them with $4.3 billion in new loans. On Wednesday, it carried out a similar operation for the equivalent of 3.95 billion euros in bonds and loans at its French operation SFR and another European entity. Here's what it gained:

Reshuffle
Altice's twin refinancing operations gave it slightly better terms than before
Source: Company reports

Notably, Altice is taking out loans instead of bonds, unlike last year when it did several big refinancing rounds. The cost was lower on secured loans, which are roughly eight and a quarter years long.

The choice of loans over bonds has implications though. Altice would've had to put up assets as collateral, and is exposing itself to a bit more risk on rising interest rates (the loan rates move with the market). While loan investors accept marginally lower returns than bond investors, and less liquidity, they get stronger covenants in return. What may seem smart financing for Altice in good times could restrict restructuring flexibility if things turn sour.

Welcome to balance sheet management, Drahi style. It's the financing side of the Altice playbook of buying cable and mobile companies and slashing costs to improve profit.

On the borrowing front, Altice actively tends to its debt pile to capitalize on trends in high-yield bond markets, currency moves between dollars and euros, and other arbitrage opportunities. It raises money in the U.S. then flips it to euros, with complex hedges in place. When the slightest shift occurs, it jumps into action, as it did last week when the U.S. high-yield market began to turn.

Good Timing
Altice refinanced after spreads between junk bonds and U.S. treasuries started to expand recently
Source: Bloomberg

With the Fed having just hiked rates and several more rises expected this year, it's prudent to lock in funding. But all this activity eked out only an incremental edge: Altice will save about 120 million euros in annual interest from the last two refinancing operations on a yearly interest bill of 3 billion euros.

Altice has adopted these techniques from Europe's biggest cable company Liberty Global Plc, backed by Drahi's mentor and rival John Malone. Altice finance chief Dennis Okhuijsen used to be Liberty's financial guru. Liberty also re-financed a big portion of debt last year, and on Tuesday completed a bond exchange offer at its British unit Virgin Media.  

Busy Beavers
Altice and Liberty Global both actively manage their high debts
Source: Company reports

In some ways, Altice is being even more aggressive than Liberty since it's younger and more deal-hungry. While Liberty's European expansion has slowed, Altice wants to expand its U.S. cable business via acquisitions and is considering a share sale there later this year. Altice's net debt was 5.6 times Ebitda at the end of last year, higher than Liberty's 4.9 times. Both groups carry more debt than traditional telecoms companies, meaning they devote more capital to interest costs and have less for capex or shareholder returns.

To put the cost into context, Altice's 3 billion euros of interest payments last year would've pretty much wiped out the 3.2 billion euros in cash generated from operating activities. 

No-one's doubting Drahi's financial acumen. What's in question is whether his balance sheet and cost-cutting wizardry extends to fostering growth at his companies. So far the U.S. looks in decent shape, France less so. Time to focus on that.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Leila Abboud in Paris at labboud@bloomberg.net
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net