MSOs May Go Back to Junk-Bond Well

7/16/2000 8:00 PM Eastern

The high-yield cable-bond market is beginning to show signs of resurgence, with at least four companies in the sector expected to issue debt soon.

The high-yield market for cable bonds has been sluggish this year. But as interest rates show signs of stabilizing and cable companies find a need for capital to finance upgrades, several analysts see them returning to tap the junk-bond market.

"The high-yield market is awakening from a relatively dormant state in terms of new issuance this year, but we haven't arrived yet at anything comparable to the volume of issuance we had in the past two years," UBS Warburg executive director and senior telecommunications and cable-television analyst Aryeh Bourkoff said.

Bourkoff added that although the amount of debt issued is expected to be higher, the number of issuers is likely to be lower. And the bond offerings should come from the more established issuers, like Adelphia Communications Corp., Charter Communications Inc., EchoStar Communications Corp. and Insight Communications Co. Inc.

According to some analysts, Adelphia could issue between $200 million and $400 million in high-yield debt, mainly to help finance its recent acquisition of GS Communications Inc., a cable operator based in Frederick, Md., for $836 million.

Adelphia has said in the past that it would like to finance acquisitions one-half through debt and one-half through equity.

Charter-which has a $1 billion bridge loan through Morgan Stanley Dean Witter & Co.-could refinance that debt with junk bonds.

Bourkoff said that although several rural cable MSOs tapped the high-yield markets in 1999, that was not expected this year. But he added that some residential competitive local-exchange carriers could raise money in the junk-bond market. CLECs that are also cable overbuilders, such as WideOpenWest LLC and Western Integrated Networks LLC, could also do well, he said.

"There has been a real bi- furcation between the rural cable companies and the larger cable companies," Bourkoff said. "A lot of the rural cable companies are no longer able to issue debt. However, there is a backlog of first-time issuers in the residential CLEC market, like WOW and WIN, which are waiting to come back to the market when the high-yield market gets better, but not necessarily this summer."

WOW and WIN had raised substantial sums earlier this year through venture-capital firms, but could also look to the debt markets as their funding needs grow, he added.

"Certainly, [the residential CLEC business] is a growth business," Bourkoff said. "As these companies expand their business models, they can certainly tap the public markets on the debt side and the equity side."

But one thing that shouldn't spur the junk-bond market is an anticipated $3 billion investment-grade offering that was expected late last week from AT & T Corp.

"The buyer bases [between investment-grade and high-yield bonds] are very different," Bourkoff said.

July is traditionally a slow period for the bond market. But coming off a hot June, which saw about $56.7 billion in investment-grade and high-yield issues, the momentum is expected to carry over well into this month and perhaps beyond.

"I would say the market window is opening, but it's not fully opened yet," Merrill Lynch & Co. high-yield-bond analyst Oren Cohen said. "There are a bunch of companies still on the sidelines."

Cohen added that while new high-yield issues should pick up, some of the larger players in the cable industry-including Adelphia, Cablevision Systems Corp. and Charter-are at an advantage because they can always go to the banks for money if bond interest rates are too high.

"All of these guys have bank facilities that are undrawn," he said.

Bourkoff said the high-yield market should rebound because there is a tremendous need for capital as cable companies accelerate their upgrade plans. Couple that with stable interest rates, and tapping the junk-bond market looks like an attractive alternative to raise the needed funds.

"The high-yield market has gotten marginally better because of additional cash inflows into mutual funds, which have increased demand somewhat. Secondly, the interest-rate environment has stabilized. Thirdly, there has not been that much supply," Bourkoff said. "The market will come back slowly."

Cohen said some high-yield investors are still smarting from past losses.

"There's always tension between the bond market and the stock market," he added. "There has been an upswing in defaults in the high-yield markets and a lot of marginal issues in the past few years. Investors in high-yield bonds have been wary of the market. The funds flows have not been [what they were], but we're starting to see funds flowing back."

Bonds, Cable Bonds

Company Amount Date

AT & T Corp.

$3 billion

Week of July 10

Adelphia Communications Corp.

$200 million to $400 million


Charter Communications Inc.

$1 billion


EchoStar Communications Corp.



Insight Communications Co. Inc.



Source: industry analysts

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