Altice's financial instability poses a significant threat to the leveraged finance sector, particularly affecting the market for collateralized loan obligations (CLOs). The potential downgrade of Altice France's debt to Triple C could force CLOs to sell off their holdings at reduced prices due to strict regulations on owning high-risk junk debt.
Altice France, a key division within billionaire Patrick Drahi's telecom empire, is under pressure to reduce its €24 billion debt. The conglomerate faces a corruption investigation and a ballooning total debt nearing $60 billion, exacerbated by aggressive acquisitions and cheap borrowing.
The implications of a downgrade are extensive, given Altice's substantial debt and the fact that 90% of European CLOs have exposure to it. This situation could destabilize the entire market, impacting banks' confidence in funding mergers and acquisitions.
CLOs are designed to maintain a maximum of 7.5% of their portfolio in CCC or lower-rated debt. Surpassing this threshold could lead to reduced cash distributions to investors or force the sale of loans at a loss. The looming downgrade of Altice is already affecting the value of similar investments, as seen with Zayo's $5 billion leveraged loan.
Despite these challenges, the CLO market has demonstrated resilience in the face of past crises. Analysts from Citi highlight that most CLOs can absorb the impact of Altice's downgrade, which would only occur if the company proceeds with a distressed debt buyback.
Altice's ongoing negotiations with creditors and the recent sale of at least $2 billion of its debt underscore the severity of its financial distress. The company, along with its creditors, has engaged financial and legal advisers to navigate this crisis.
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