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Downgrade Adds to Charter Woes

11/03/2002 7:00 PM Eastern

The bad news continued for Charter Communications Inc., as one major credit rating agency lowered its ratings on the MSO, and a second threatened to do the same last week.

Charter — battered after a week in which its chief operating officer was placed on paid leave in connection with a federal probe into its accounting practices, and by disappointment over pre-released third-quarter financial figures that were below expectations — faces even more scrutiny this week, as it gears up for the official release of its third-quarter results. Executives with the St. Louis-based MSO will face a group of anxious analysts on its quarterly conference call, slated for Tuesday (Nov. 5).

Charter stock, down more than 90 percent this year, got a lift Oct. 25 after it was revealed that HDNet president and Broadcast.com founder Mark Cuban purchased more than 15 million shares (or 5.3 percent) of Charter stock.

Although Cuban's investment was small — about $15 million, compared to the billions he is worth — it was a sign of encouragement for a stock that has lacked it in recent months.

Charter's stock rose by 33 percent, or 31 cents, on Oct. 25, to close at $1.25. It has hovered around the $1 mark ever since.

In published reports, Cuban said his investment in Charter was due to his faith in the MSO's management and in its largest shareholder, fellow computer whiz Paul Allen, "whose vision of connectivity I share," Cuban told the St. Louis Post Dispatch.

Moody's acts first

That optimism was short-lived, as Moody's Investors Service lowered its ratings on $22 billion of Charter Communications Inc. debt Oct. 28, citing concerns over the company's poor operating performance.

Moody's lowered Charter Communications Holdings LLC one notch to "B3"; cut the parent's convertible senior debt two notches to "Caa2" from "B3"; and downgraded Charter bank debt. It said more downgrades are possible.

On Oct. 29, Standard & Poor's revised its CreditWatch implications for its ratings on Charter to negative from developing. The revision means S&P will not raise those ratings in the near term.

The ratings revisions were the latest in a series of pitfalls for the MSO, which began when it announced Oct. 22 that it had placed chief operating officer David Barford on paid leave, in connection with a federal grand jury investigation into its accounting practices that began in August. Later that same week, Charter released disappointing preliminary third-quarter financial results that included a loss of 85,000 basic video subscribers, which further hurt the stock.

In a press release, Moody's said those results — operating cash flow growth of 8.7 percent and revenue growth of 12.6 percent — were disappointing. Charter is expected to release its full third-quarter results on Nov. 5.

"Today's interim rating actions are intended to represent our belief that the negative operating trends and broader risks facing the company are greater than we previously thought and may not be imminently reversed and/or mitigated," Moody's said in a statement.

Trilogy Capital Inc. partner Oren Cohen said he was most concerned about the subscriber losses, rather than the revenue and cash flow numbers or even the grand jury investigation.

"That was the one piece of the equation that surprised me," Cohen said of the subscriber losses. "I'm hoping to get some answers on the conference call."

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