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Wometco Cable Bondholders Win Militant Payoff

By Linda Sandler. Wall Street Journal, Eastern edition [New York, N.Y] 20 Jan 1989:
1.

Abstract (summary)
The players included the Texas investor Robert Bass, who stripped major assets from Miami-based
Wometco before the company was sold, and closely held Cablevision Industries, a big cable concern in
Liberty, N.Y., that nearly tripled its debt to buy Wometco for $723 million in December. And there was the
white-shoe investment banker Morgan Stanley, representing both Mr. Bass and Cablevision.
After much acrimony on all sides, holders of Wometco's high-yield "junk" bonds pocketed a big bonus for
sanctioning changes in Wometco's bond indentures to allow Mr. Bass and his partners to take out the
assets, which some value at $300 million. With bondholders everywhere getting hammered as companies
cut out assets or add debt to merge or go private, Wometco's militants are becoming a sign of the times.
Bondholders' risk was magnified, because Mr. Bass wanted to retain Wometco's Atlanta cable properties,
which some investors call the crown jewel. To remove the asset, Mr. Bass needed Wometco bondholders'
consent. He had profited from Wometco, so bondholders, who had shared some of his risks, wanted to
share his riches. Mr. Bass invested only $50 million of equity to buy Wometco in 1986 from Kohlberg
Kravis Roberts. Two years later, he wanted to sell it, while taking out assets some valued at six times his
initial investment.

Full Text
NEW YORK -- A militant group of Wometco Cable TV bondholders is crowing about how it recently
extracted big concessions from some hardheaded negotiators in return for taking on new risks.
The players included the Texas investor Robert Bass, who stripped major assets from Miami-based
Wometco before the company was sold, and closely held Cablevision Industries, a big cable concern in
Liberty, N.Y., that nearly tripled its debt to buy Wometco for $723 million in December. And there was the
white-shoe investment banker Morgan Stanley, representing both Mr. Bass and Cablevision.
After much acrimony on all sides, holders of Wometco's high-yield "junk" bonds pocketed a big bonus for
sanctioning changes in Wometco's bond indentures to allow Mr. Bass and his partners to take out the
assets, which some value at $300 million. With bondholders everywhere getting hammered as companies
cut out assets or add debt to merge or go private, Wometco's militants are becoming a sign of the times.
Companies that need bondholders' permission to shed assets or add new debt often dole out "consent
payments." But Wometco's bondholders believe they did unusually well at this game. They got a package

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valued at $15 million to $25 million, depending on who is talking: $8 million in cash up front, plus higher
interest rates.
The Wometco battle reveals the bluff and bluster that accompanies such bargaining. It also shows how an
investment banker's first loyalty may lie with fee-paying clients, rather than with investors to whom it sells
bonds.
Bondholders got less money -- and fewer covenants -- than they wanted. But they got three to five times
the $4.5 million payment offered by Morgan Stanley last fall, which didn't include a higher coupon on
Wometco bonds.
"It's a good example of how bondholders, if united, can change a deal," says Charles Davidson of
Steinhardt Partners, New York. Steinhardt led the fight after rounding up 21 institutions that held 73% of
Wometco's $305 million face value of bonds. The bondholders' steering committee included Steinhardt,
Huff Asset Management, T. Rowe Price Associates and United Savings Bank in Houston.
Wometco holders say their bonus was only fair, as they faced losses in holding less-credit-worthy bonds of
a more leveraged, merged concern, namely Cablevision. The merger pushed Cablevision's debt up by $662
million, to $1.1 billion. Traders say the bonds trade infrequently, so it is hard to tell whether their prices
have held up since the merger.
Bondholders' risk was magnified, because Mr. Bass wanted to retain Wometco's Atlanta cable properties,
which some investors call the crown jewel. To remove the asset, Mr. Bass needed Wometco bondholders'
consent. He had profited from Wometco, so bondholders, who had shared some of his risks, wanted to
share his riches. Mr. Bass invested only $50 million of equity to buy Wometco in 1986 from Kohlberg
Kravis Roberts. Two years later, he wanted to sell it, while taking out assets some valued at six times his
initial investment.
As the fight unfolded, Steven Rattner, Morgan Stanley's star media-industry investment banker, left the
bondholders cooling their heels for 20 minutes at an initial meeting in November of representatives from
each group. Then the bondholders read a list of demands, Mr. Rattner threatened to push the merger
through without their consent, and everybody dispersed angrily. The exchange took all of five minutes.
Mr. Rattner disappeared from negotiations after irate calls from bondholders to other Morgan Stanley
officials. And Morgan Stanley itself wasn't in the final talks. Bondholders threatened lawsuits and a
declaration of default before being taken seriously.
Mr. Rattner won't comment. A Morgan Stanley official says, "There was a full opportunity for give and take
at the meeting." He adds that "it's common for different parties to meet at different times, including
principals alone." But these clients weren't enthralled with Morgan Stanley's handling of the affair, says a
person who is close to clients of the firm.
A Morgan Stanley official concedes, "The cost of these consents is going up as bondholders get more
organized." But he says Wometco's final bonus, which he values at $15 million, represented 5% of the
bonds' face value and was "at the low end" of payments in recent months wrung from Playtex and BCI
Holdings, the former Beatrice.
"The deal ended as other successful consent solicitations end, with a compromise that gives all parties
what they need," the Morgan Stanley official says. Mr. Bass apparently will bear the brunt of the
settlement and Cablevision will pick up the rest.

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A person familiar with Mr. Bass's thinking scoffs at the idea that bondholders should share equity investors'
riches. Bondholders' compensation for risk is their high yield, adds an individual familiar with Cablevision.
These people say the merger could have been completed without bondholders' consent but Mr. Bass and
Cablevision caved in to avoid lawsuits and future resistance to junk bonds they might issue.
William Effler of American Money Management in Cincinnati -- an affiliate of Carl Lindner's American
Financial that held 12% of Wometco's zero-coupon bonds -- didn't join the militants. The firm also had
equity in Mr. Bass's partnership that sold Wometco and thus benefited from the merger. But Mr. Effler has
joined other bondholders' groups and says: "In some cases, bondholders' interests have not been dealt
with appropriately. We'd side with them in trying to get their voice heard."
Early in the negotiations, bondholders' representatives lunched with Steve Jetelson, a senior Morgan
Stanley trader. They found him sympathetic, but he couldn't promise the merger and asset transfer would
be delayed until bondholders consented. Morgan Stanley valued bondholders' demands at more than $50
million, though the debt holders dispute that figure.
Then, bondholders declared what their attorney, Robert Miller, calls "an anticipatory default." He says Mr.
Bass and Cablevision had indicated an "intention to default" by violating a key Wometco covenant that
limited dividend payments. "We argued the covenant also prevented dividends in the form of asset
transfers," he says.
People on the other side say this was just a bluff. But soon afterward, representatives of Mr. Bass and
Cablevision met with bondholders and quickly hammered out a deal.
Why does Morgan Stanley put the final payment at $15 million, while bondholders value it at $25 million?
Morgan Stanley says the one to two percentage-point increases in Wometco bonds' coupons should only be
counted for a few years, not for the life of the bonds; they are expensive now and probably will be
redeemed within five years.
Meanwhile, the bondholders are laughing all the way to the bank.
Copyright Dow Jones & Company Inc Jan 20, 1989

Indexing (details)
Title

Wometco Cable Bondholders Win Militant Payoff

Author

By Linda Sandler

Publication title

Wall Street Journal, Eastern edition

Pages

Number of pages

Publication year

1989

Publication date

Jan 20, 1989

Year

1989

column

Heard on the Street

Publisher

Dow Jones & Company Inc

Place of publication

New York, N.Y.

Country of publication

United States

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Publication subject

Business And Economics--Banking And Finance

ISSN

00999660

Source type

Newspapers

Language of publication

English

Document type

NEWSPAPER

ProQuest document ID

398111525

Document URL

http://search.proquest.com/docview/398111525?
accountid=38148

Copyright

Copyright Dow Jones & Company Inc Jan 20, 1989

Last updated

2010-06-26

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