Optimum Likely Dropped Down Conn., NJ, Most of Its NYC Area Assets in Unrestricted Subsidiary Transaction; 2-Step Takeout of TL B-6 Joins Long List of Multistep LMEs to Circumvent Lender Protections

• Octus believes that the assets that Optimum Communications, fka Altice USA, dropped into a newly created unrestricted subsidiary to raise $2 billion of new debt include the majority of its east region fiber and cable assets, which are in Connecticut, New Jersey and the greater New York City area, excluding those assets in Brooklyn and the Bronx that were used to support its fiber securitization in July.
• The transactions entered into last week appear to be entirely driven by the company’s desire to pay off its B-6 term loan, the most restrictive borrowing in its capital structure, releasing the company from its restrictions, as the new financing did not meaningfully extend any maturities.
• The transactions use voluntary prepayment mechanisms to produce an interesting result: a partial covenant strip implemented unilaterally by the borrower and a third-party capital provider without the consent of a majority of the holders of the existing CSC Holdings restricted group credit facility.

Last week Optimum Communications, fka Altice USA, announced that it had repaid its term loan B-6 using proceeds from a newly raised term loan B-7, and subsequently dropped down a material amount of assets into an unrestricted subsidiary to raise new debt at the new unrestricted subsidiary with the proceeds used to repay the term loan B-7. Notably, the new unrestricted subsidiary credit agreement includes a novel anti-cooperation provision, as we discussed previously.

The transactions did not materially alter either the maturity profile or cash interest expense of Optimum, and in our view the purpose seems to solely be the payoff of the B-6 term loan, which was previously the most restrictive document in the restricted group’s capital structure. For the avoidance of doubt, any reference to CSC or CSC Holdings describes Optimum’s restricted group entities.

Dropped Down Assets Likely Make Up Majority of Metro NYC, NJ, Conn. Service Area

Octus believes that the assets dropped down to the new unrestricted subsidiary in the transaction may be all of the company’s East Region assets, with the exception of its Bronx and Brooklyn assets, which were used as collateral for the company’s July ABS transaction.

The unrestricted subsidiary credit agreement states that the parties to the agreement and their subsidiaries “own, lease or license all material assets and material access rights, taken together as a whole, required to provide video, IP-delivered voice, and related services delivered via fiber optic or hybrid fiber-coaxial networks within the area where the Listed Entity and its Subsidiaries currently operate within Connecticut, New Jersey and New York (excluding Brooklyn and the Bronx)” (emphasis added).

Optimum’s network comprises two parts: the legacy Cablevision business that operates in the greater New York City area, including New Jersey and Connecticut, which the company refers to as its East Region, and its legacy Suddenlink business including its operations in the rest of the country, which it refers to as its West Region.

While attributing value between the East and West is difficult, as the company does not disclose subscribers, EBITDA or similar metrics by region, the East region is generally considered to be more valuable than the West. Reasons for this include that networks with a higher mix of fiber and its attendant growth rate, such as in the East, have generally transacted at premium multiples compared with cable or copper-based digital subscriber line, or DSL, networks. Optimum’s East footprint is essentially fully built out with fiber, compared with its West, which remains largely cable based.

The below map, generated from the Federal Communications Commission’s national broadband map, shows the distinction between the two regions, colored by service type. Fiber-to-the-home is shown in purple with cable shown in red.

Covenant Rationale: The B-6 Two-Step

Optimum’s recent transactions appear to have been structured in two steps to overcome certain restrictions in the existing CSC credit agreement that otherwise might have prohibited the dropdown. It joins a long list of multistep transactions – including Wesco/Incora, Robertshaw, Better Health and Oregon Tool – where new debt was temporarily inserted to circumvent existing lender protections before being taken out by a new facility.

Prior to the November transaction, the existing CSC credit agreement contained a variety of enhanced lender protections including, among others, a J.Crew blocker and heightened restrictions on investment capacity, which were inserted by the 13th amendment dated Dec. 19, 2022, in connection with the incurrence of the term loan B-6. However, the 13th amendment provided these additional lender protections for the benefit of the term loan B-6 only and not the other tranches.

Although many of these enhanced protections could have been removed with the consent of a majority of the holders of the term loan B-6, this would not have been a viable option for the company given the term loan B-6 holders’ participation in the cooperation agreement group, which, per information disclosed in the Southern District of New York litigation, included approximately 100% of the outstanding term loan debt at CSC.

However, another way to remove the protections impeding the dropdown, and the path the company ultimately chose, was to voluntarily prepay the term loan B-6 at par with the proceeds of a third-party debt raise, thereby forcing the term loan B-6 out of the structure. Although the existing cooperation agreement allegedly prohibits co-op group term loan B-6 holders from assigning their holdings to the company, it cannot stop Optimum from voluntarily paying down the term loan B-6 at par.

Additionally, because voluntary prepayments (section 2.12) are exempt from the credit agreement’s pro rata sharing requirements (sections 2.17, 2.18), voluntary prepayments of the term loan B-6 are not required to be shared ratably with other classes.

Voluntary prepayments were similarly weaponized in Robertshaw’s December 2023 refinancing, where new-money proceeds funded a voluntary prepayment of the most senior term loan tranche, which forced Invesco out of its majority “Required Lender” position in the leadup to the company’s February 2024 bankruptcy filing. For further discussion of other maneuvers that borrowers and sponsors can use to overcome lender blocking positions, see our Covenants’ educational series on “Controlling the Vote”.

In Optimum’s case, the initial third-party financing came in the form of the $2B incremental term loan B-7 provided by JPMorgan Chase Funding, or JPMCF, and implemented under the existing CSC credit agreement by the 14th amendment dated Nov. 25. The 14th amendment reversed substantially all of the exclusive term loan B-6 protections, including the dropdown protections, but otherwise made few other substantive changes. The maneuver yields an interesting result: a deal-away with elements of a “consensual” liability management exercise, in which a partial covenant strip was implemented by the borrower and a third-party capital provider without majority consent under the existing facility.

Having served the purpose of stripping the term loan B-6 protections and facilitating the asset transfer to the unrestricted subsidiary, the term loan B-7 was then immediately taken out with the proceeds of the new dropdown financing, also provided by JPMCF.

We note that a pari-plus structure might have been implemented if, in lieu of cash-paying the term loan B-7 with the dropdown proceeds, the term loan B-7 had instead been acquired by the newly formed unrestricted subsidiary in exchange for the new dropdown debt, thereby putting a pari secured intercompany incremental term loan in the hands of the unrestricted subsidiary, similar to what was done in Trinseo’s 2023 pari-plus transaction.

Following the 14th amendment, the CSC credit agreement would have permitted (i) the company to acquire term loans for noncash consideration and (ii) term loans acquired by unrestricted subsidiaries of the borrower to remain outstanding. These flexibilities, however, likely could not have been used to transfer the term loan B-7 to the unrestricted subsidiary for at least three reasons.

First, the pro rata turnover provision in section 2.18 expressly applies to purchase consideration received from assignments to “Affiliates of the Borrower,” which would include the unrestricted subsidiary. Second, such assignment to an unrestricted subsidiary might have been subject to the “Affiliated Lender Cap.” Third, the credit agreement’s unrestricted subsidiary designation mechanics prohibit unrestricted subsidiaries from holding debt of the CSC restricted group at the time of designation.

Although the last restriction could potentially have been circumvented by having the unrestricted subsidiary acquire the term loan B-7 after the designation, the maneuver as a whole likely would have invited unnecessary litigation risk, especially if the new dropdown debt was already sufficiently collateralized by the transferred assets.

Pro Forma Capital Structure

As described above and in the company’s 8-K, the transactions were effectuated in two steps: (1) the incurrence of the term loan B-7 to repay the term loan B-6 and (2) the incurrence of the dropdown financing to repay the term loan B-7. Optimum’s pro forma capital structure illustrating the two steps is shown below, and available on Octus HERE.

Optimum’s debt maturities by year are shown below, both before and pro forma the transactions, and we would highlight that there is no substantial change to the maturity profile, other than a slight increase in the amount due in 2028 to account for the slightly different size of the $2 billion unrestricted subsidiary term loan versus the $1.952 billion payoff balance of the term loan B-6. Debt issued at Lightpath is shown separately.

Likewise, we anticipate a minimal change in cash interest stemming from the transactions. The B-6 term loan carried a rate of SOFR+4.5%, which, according to the company’s 10-Q, was 8.65% as of Sept. 30, while the unrestricted subsidiary term loan has a 9% fixed rate. At $2 billion in principal, the company will incur $180 million in annual cash interest on the unrestricted subsidiary term loan, or about $7 million more than on the B-6, assuming no change in SOFR compared with Sept. 30.