The telecommunications group Altice has taken out a margin loan of over £1 billion on its stake in BT. This move underscores the high-risk debt management that is now increasing pressure on the vast enterprise of billionaire Patrick Drahi.

The 24.5% stake of Drahi in BT was built up through significant loans and derivative financing, which allowed Altice to heavily collateralize against the shares, according to people familiar with the situation and credit documents obtained by the Financial Times.

The borrowing against the £3.5 billion shareholding raises questions about whether Drahi can maintain the BT stake long-term, especially given the rising debts of his broader empire.

Altice expanded significantly in an era of cheap money, transforming from a niche cable company into a global telecommunications giant stretching from the US to Portugal. However, lenders who have extended over $60 billion in debt to its three main business units are now preparing for debt restructuring negotiations as concerns arise about the impact of rising interest rates and a criminal investigation against one of Altice's co-founders.

Altice UK, now BT's largest investment vehicle, initially established an 18 percent stake in 2021 by using so-called financed equity collars from BNP Paribas, Citigroup, and Morgan Stanley. This financing technique combines derivatives with bank loans, allowing investors to simultaneously build a stake with borrowed money and hedge their position against price losses.

In January 2022, Altice signed a new margin loan facility with the same three lenders and Deutsche Bank, allowing the company to borrow up to £1.5 billion against BT shares. Altice withdrew the majority of the loan over the course of the year to resolve some of its collar financings.

Margin loans are considered risky for borrowers as lenders may require additional collateral — usually in the form of cash — if the underlying stocks lose value. These margin calls can place additional pressure on investors during financially strained times. Banks can also seize and sell the stocks if a borrower defaults on the loan.

In contrast, equity collars protect investors from price losses by limiting potential returns when stock prices rise.

Altice later used additional collar financings to increase its stake in BT to nearly 25 percent in May 2023. One of the people familiar with the terms added that the group has since repaid part of the margin loan.

While Altice is under pressure in the debt markets, the four banks behind the BT margin loan are not particularly worried about their exposure. According to sources close to the lenders, the loan is well secured by the value of BT shares — a large and liquid stock that is represented in the FTSE 100 index.

Drahi owns the majority of Altice shares, despite having signed complicated side agreements in the past to share a portion of his profits with Armando Pereira, the co-founder of Altice, who was arrested last year in Portugal as part of a corruption investigation.

Pereira has denied any wrongdoing, while Drahi stated last year that he would feel 'betrayed and deceived' if the allegations against his long-time business partner prove to be true.

Altice's margin loan on BT initially had a loan-to-value ratio of 60 percent — meaning it had to pledge £100 in shares to borrow £60 — and a term of three years.

The BT shares have fallen by almost a quarter since the loan was taken out, but recovered after the new CEO Allison Kirkby outlined her plans for restructuring the company during the annual results in May of the FTSE 100 company.

Drahi was recently joined by another telecom tycoon, Carlos Slim, in the BT shareholder register; in June, it became known that the Mexican billionaire had acquired a 3% stake in the British telecom group.

When Altice UK increased its stake in BT to nearly 25 percent in May 2023, Drahi's telecom investment group stated that they continued to hold the management in high esteem and fully supported their strategy.

It was confirmed that there are no plans to make an offer for the British telecom group, but this would be revisited if a third party announces an offer.