Cash Flow Helps Cable Debt Market

A rash of recent debt issues from cable and media companies proves the capital markets remain open to those businesses with cash flow and revenue growth potential.

The absence of issues from cash-poor companies that need an influx of funds to continue capital expansion plans underscores the slowdown in the broader economy.

While "good ideas will still raise money," it will be clearly harder for those firms within the cable universe without clear-cut business plans, says Peter Ausnit, an analyst following interactive TV firms at Deutsche Banc. Alex. Brown.

Last year, he says, the capital markets — not to mention investors — were eager to embrace experimentation and risk, he says. The outlook is vastly different now. New network overbuilders, for example, are finding it harder to raise money, while the slowdown for telecom and digital subscriber line (DSL) providers seems to cause a bankruptcy a week.

What’s different now?

"The hurdle rates are rising," for one thing, he says. "The business value you bring to the table in my mind is going to have to go up in an environment where people are less experimental. [There is] less reward for innovation as opposed to profitability. Things will get tested against profitability very quickly."

Although cable operators are shoveling nearly all of their cash flow into rebuilding and upgrading systems, projections for cash-flow growth are generally in the double-digits — a far cry from a company that is years away from the break-even point.

So while investors are generally wary of debt, especially in a slowing economy, the Federal Reserve’s surprise half-point interest-rate cut in early January flung the capital-raising window wide open.

Several companies took advantage; about $34 billion in debt was sold last week alone, according to a Reuter’s report.

Within days of the Fed’s cut, three cable operators, Comcast, Adelphia Communications and Charter Communications as well as media company Viacom rushed to sell huge issues.

Comcast on Thursday planned to sell $1.5 billion of notes, $500 million of which will reportedly yield about 1.65 percentage points higher that similar maturity U.S. Treasuries, and $1 billion of 10-year notes, which will reportedly yield about 1.8 percentage points higher than Treasuries. The issue comes less than a month after the company sold $1 billion of convertible bonds, which were used to pay down and replace debt.

Earlier in the week, Viacom sold $1.65 billion of debt in a private placement through Merrill Lynch and Salomon Smith Barney, an increased issue from the $1.5 billion Viacom had initially planned. The offering, sold in three tranches, priced at yields of over Treasuries of 1,75, 1.85 and 2.0 percentage points.

On Jan. 7, Adelphia said it will raise $885 million in a stock and debt sale. It planned to issue $400 million in convertible debt with a maturation date of 2006, and $485 million of its Class A common stock.

Earlier this month, Adelphia closed on a $1.3 billion short-term credit facility, and in September it sold about $775 million of high-yield debt to repay other debt.

Lastly, Charter Communications Jan. 5 said it entered an agreement to sell $1.75 billion in senior notes in a private sale arranged by Goldman Sachs and Morgan Stanley Dean Witter. Charter’s offering as more than doubled from its original planned size of $850 million.

Charter will use the proceeds to repay the $272.5 million that is outstanding under a bridge loan the company received last August, as well as to repay certain amounts outstanding under the company’s revolving credit facilities. Charter’s offering was expected to close Jan. 10.