Bond Rater Questions Canadian MSO Debt

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"These highly leveraged companies ought to lower their financial risk." PaulHolman, vice president, Dominion Bond Rating Services

Toronto -- Heavy debt loads and increased competition coulddrive investors away from Canada's major MSOs, warned Dominion Bond Rating Service.

For those willing to invest in cable, "the businessrisk has increased because of growing competition that will come about in the next fewyears," said Paul Holman, vice president of DBRS, based here.

This competition will cut into the MSOs' earnings, headded, magnifying to investors just how much debt they're carrying. In turn, thiswill drive cable stocks down, making it harder for companies to raise capital.

"What we're pointing out is that these highlyleveraged companies ought to lower their financial risk to neutralize the overallimpact," Holman said.

Given that competition will limit their ability to raiseprices, he recommended selling off noncore businesses to pay off debt.

At the forefront of the leveraged companies is RogersCommunications Inc., owner of Rogers Cablesystems, the country's largest MSO. As aresult of an acquisition spree a few years ago, RCI is leveraged "more than 100percent," Holman said. This means that RCI's debt exceeds its total capital,making its equity "essentially negative." In reaction to this, DBRS has loweredRogers' bond rating from "B high" to "B low." (RogersCablesystems itself is rated as "B.")

In better health are BBB-rated Canadian MSOs ShawCommunications and Le Groupe Videotron, both of which are leveraged at about 70 percent.

"Although that's high, it's not unreasonablyhigh," Holman said, "but it could be a little bit too high if competition in thenext couple of years turns out to be aggressive."

RCI's manager of investor relations, Richard Harvey,downplayed the importance of the lowered DBRS bond rating. He said that since DBRSdoesn't have access to RCI's business plans, its ratings are not as important asthose delivered by Standard & Poor's Corp. and Moody's Investors ServiceInc., which do have access to the plans. S&P gives a BB- rating to RCI's seniorunsecured debt and an overall corporate credit rating of BB+.

As for divesting itself of noncable businesses, such as theMaclean Hunter publishing group, Harvey said, "From a balance-sheet perspective, itwouldn't hurt, but that's not necessary," since most of RCI'soutstanding bonds aren't due until 2006 or beyond.

He also downplayed RCI's stock being dropped from theToronto Stock Exchange's TSE 100 index for its poor performance, saying, "Sincewe've gone off the index, I think that our shares have actually gone up."

Still, RCI's being booted off the TSE 100, combinedwith DBRS' critical rating, could hurt less-leveraged Canadian cable companies suchas Shaw and Videotron, which are in the costly process of upgrading their networks.

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