Description

Liberty Broadband (LBRDA) recently completed a merger with GCI Liberty (GLIBA), which itself was a combination of an operating asset (General Communications (GNCMA), an Alaskan cable company) and a Liberty entity (Liberty Ventures) that post combination mostly held Charter (CHTR) and (LBRDA) shares. 

During the creation of GCI Liberty, a 7% perpetual preferred was issued to GNCMA shareholders (GLIBP).  On 12/18/20, LBRDA and GLIBA successfully merged, and GLIBP holders were given a similar security in LBRDA.

The combination of LBRDA and GLIBA was written up by phn19 on 9/7/20 and more background can be found there about why LBRDA is an attractive way to create exposure to CHTR at a discount.  CHTR’s relative value isn’t that important for our discussion here, except to say that if you hate CHTR and think they’re going bankrupt, then you wouldn’t want to buy this asset.  What is important is that phn19 is right to assume at some point, CHTR will look to collapse LBRDA into itself and LBRDP would turn into a perpetual preferred of CHTR.

LBRDP has a 7% coupon and a $25 par value.  At $28, it is yielding 6% to a par call on 3/10/39.  The loan-to-value of the security is vastly better than what it was as GLIBP, yet the yield has not changed at all.  As shown below, the LTV pro forma for the merger has improved from 30% to 11% given the large amount of CHTR shares LBRDA owns.

I see two ways to look at how to price this – 1) off treasuries or 2) vs. CHTR. 

Since 2019, GLIBP/LBRDP has consistently yielded 400-500bps above 30yr treasuries, COVID correction aside.  Post the merger, that spread should tighten given the materially better LTV.  

If the assumption of an ultimate collapse of LBRDA into CHTR is correct, we should also look at this yield vs CHTR’s longer duration bonds.  COVID correction aside, it has fluctuated from 100-200bps above CHTR’s 5.75% due 2048 bonds.  At the current 180bps, it’s on the higher side. 

At a current 6% yield with a 11% LTV, I think this is one of the most attractive securities out there from a risk/reward perspective.  With the Fed committed to a low interest rate environment, the reach for yield has pushed risky asset classes to the lowest yield in years.  For example, CCC rated high yield is yielding 7.25% per Credit Suisse.

I think a 5% yield is not out of the realm of possibility, which would imply a $31 price target.  Combined with the $1.75 annual coupon, the total return would be 17%.

Catalyst

New balance sheet when earnings come out showing LTV