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MAVIS SCANLON
AT&T's credit-rating cut is a wake-up call for those cable investors unconcerned about rising debt levels and over-burdened balance sheets.
The telecom and cable giant, with its long-distance and wireless units, is somewhat of a different breed from pure-play cable companies, but its saga can certainly serve as a heads-up for companies that continue to pile on borrowings.
Early last week Standard & Poor's lowered its ratings on AT&T's $62 billion debt load and warned that further cuts may be on the horizon for the telecom and cable giant. The ratings cuts come as AT&T is planning to sell off certain assets in order to deleverage its balance sheet.
The significant AT&T assets up for sale include its 25% stake in Time Warner Entertainment, majority-owned by Time Warner, and its 30% stake in Cablevision Systems. The company may also reportedly attempt to sell the 75 million shares it owns of Vodaphone Group or its interest in Road Runner, the high-speed Internet access service.
A highly leveraged balance sheet increases the MSO's vulnerablity to adverse industry or market conditions, especially interest rate increases. In an industry where cash flow is king, highly leveraged companies typically have to devote larger portions of cash flow to servicing debt, thereby reducing funds for general working capital and capital expenditures.
"You can certainly see a good balance being rewarded and a bad balance sheet being punished," says Andrew Vinton, an associate at J. Goldman & Co. who follows the cable and interactive TV markets.
While cable operators such as Mediacom and Charter have pledged to lower their debt to EBITDA coverage ratios, cable operators will continue to incur debt in coming quarters as they continue to upgrade their sytems to 750 megahertz and two-way capability.
The trick for the MSOs is to manage their capital structure to come up with a comfortable balance of debt and equity.
Cox Communications, for example, earlier this month sold $1 billion worth of debt in two parts. The money will be used primarily to pay down some of Cox's floating rate debt.
As of Sept. 30, Cox's total debt load was $8.2 billion. While its most recent bond deal did not add to the total, Cox's debt load has jumped about 25% from the $6.4 billion in debt the company had Dec. 31.
That figure "is going to trend upward," says Mark Major, assistant treasurer at Cox. "As a company we are still a net borrower of capital because our capital expenditures are in excess of our operating cash flow."
MSOs may continue to use the debt markets rather than the equity markets because, for the last several months, their stocks have been perceived as undervalued.
"With companies issuing debt, you don't want to sell low," Major says. "If you have debt capacity available, you'd rather go to the debt market."
With a total debt load of $12.2 billion Sept. 30, up from $8.9 billion Dec. 31, Charter Communications is one of the most highly leveraged companies in the industry.
The debt market is still open to Charter, which in late October sold $750 million of senior notes in a private placement. The Paul Allen-controlled company used those funds to repay a portion of a $1 billion bridge loan.
On its recent earnings conference call, Charter said that with a bank commitment of $1.8 billion it will be funded through the second quarter of 2001 and expects to be cash flow positive in late 2002.
Still, Charter is expected to go back to the debt market at some point in 2001 to continue its upgrade program. In order for it to obtain favorable rates, the capital markets will need to remain healthy.
Otherwise, Charter's shares, which at $18.50 Thursday are slightly below their IPO price, may see further choppiness.
Charter officials were unavailable for comment.
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