Case study
NTL's Financial Restructuring

by Prof. Ian H. Giddy, New York University

NTL in danger of running out of cash early 
Financial Times; Mar 28, 2002

NTL, the cable company with Dollars 17bn of debt, yesterday warned that it could run out of cash before completing its planned restructuring.

Its worsening financial position has prompted its auditors, Ernst & Young, to question whether NTL could continue as a "going concern".

E&Y is set to qualify NTL's 2001 accounts, due to be filed with the Securities and Exchange Commission next month. It will question NTL's ability to survive as a going concern into 2003.

NTL, which last year incurred a Dollars 15.8bn pre-tax loss, said this was an "appropriate" health warning given its need to restructure its balance sheet. Executives did not take questions at a conference call. They gave investors little reassurance as to NTL's current funding position.

NTL said yesterday: "There can be no assurance that we will complete a recapitalisation or financing in a timely manner in order to sustain the company's operations." Barclay Knapp, chief executive, added, however, that the company was making "substantial and rapid progress" on restructuring. "We are now in the back half of the process rather than the first half."

NTL, which incurred interest payments of Dollars 1.4bn last year, is estimated to have had about Dollars 500m cash at the end of December. It expects to receive Dollars 300m in new cash "within weeks" from the sale of its Australian broadcast mast network.

Analysts said the key issue was how much NTL had left out of the Pounds 920m (Dollars 1.31bn) bank facilities which remained unused at September 30 2001.

Some analysts forecast NTL could have as little as three months worth of liquidity left, while restructuring could take several months. They believe that NTL could imitate UPC, the Dutch cable company, by opting to save cash by defaulting on bond interest payments.

Payments of more than Dollars 130m fall due next month and company sources say that NTL does have the cash to make them.

NTL is in talks with investors holding about half its Dollars 11bn of high-yield bonds about swapping bonds for new NTL equity.

It has also approached possible new investors including Liberty Media and AOL Time Warner. Both scenarios would leave current shareholdings very heavily diluted.

Doubts over NTL's liquidity overshadowed its 2001 results which showed pre-tax losses increasing from Dollars 3.07bn to Dollars 15.8bn on turnover of Dollars 3.7bn (Dollars 2.84bn).

NTL took Pounds 8bn of exceptional charges. 

Lex Commentary

The market did not need telling that NTL will survive only if its creditors agree to a debt-for-equity swap. The cable company's liabilities exceed its assets and, as things stand, it will run out of cash by the end of the year. This is why the equity trades as an out-of-the-money option approaching expiry. The auditors' "going concern" qualification can affect only how and when capital restructuring takes place. Barclay Knapp, NTL chief executive, wants to reach a voluntary agreement. But if talks drag on, the company's advisers will eventually warn that it is in danger of trading while insolvent, forcing Mr Knapp to go down the bankruptcy route instead. 

At least NTL, unlike many other companies seeking debt-for-equity swaps, is worth saving. Underneath more than $17bn of debt is a viable business with real customers and revenues. Subtracting headquarters expenses - which NTL disingenuously excludes from earnings before interest, tax, depreciation and amortisation - ebitda is now running at $210m a quarter. But capital expenditure is still greater, ensuring an outflow of cash even before financing costs. The business could at best support half its current debt: probably less. 

At 14 times 2002 ebitda - in line with the US - NTL might be worth $15bn. Subtract $6.5bn or so senior bank debt and there would be $8.5bn of value left for junior creditors. This suggests modest upside for bonds trading at around 30 cents, post-conversion into stock. But not for the ordinary shares, which could end up with just 1 per cent of the enlarged equity. 

Excerpted from the Financial Times, March 27 2002 

Assignment: What were NTL's alternatives? Is the company worth more in liquidation, as a going, independent concern or as an acquisition target? Assuming you own NTL subordinated debt, would you choose to swap it fro equity? How would you value the equity? 

Go to Giddy's Web Portal Contact Ian Giddy at