Bond Withdrawal Shows Not All MSOs Are Alike

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Insight Communications Co. Inc.'s bond offering last
week was a raging success: The company drew more than $2 billion in orders for just $200
million in bonds.

Unfortunately, a smaller MSO found out the hard way
recently that the public debt market isn't an option for every operator. Size and
other factors, such as multichannel-video competition, still count, too.

In general, bond analysts painted a gloomy picture for
smaller cable operators looking to sell high-yield bonds.

"The market is nonexistent," said one analyst who
asked not to be named. "The only bonds that are going to be pricing are going to be
large, big issuers. This market is so choppy and volatile that it is only designed for
existing issuers, companies with great equity-market capitalizations or companies that
need the money and are willing to pay higher interest."

None of those criteria applied to Millennium Digital Media,
a St. Louis-based MSO with about 173,000 subscribers.

Millennium had hoped to sell about $360 million in bonds,
but it pulled the offering shortly after completing its road show in August.

"We could have taken a paper-driven rate that was not
attractive to us," Millennium vice chairman Jeff Sanders said. "Because of
market conditions, the pricing moved about 1.5 percentage points [of interest] against us
by the time we went on the road show and priced the thing. That was a little too much to
stomach."

Millennium wanted to help finance its $77 million
acquisition of private cable operator Cable Plus Holdings Co., repay bank debt and
capitalize upgrades and future acquisitions.

Instead, the company said it would attempt a
private-placement debt offering next year, coupled with additional bank-credit financing.

Avalon Cable LLC -- the start-up that bought the former
Cable Michigan Inc. assets in 1998 -- faced a similar problem when it tried to sell into
an even choppier junk-bond market, spooked by conditions in Russia and other global
economic factors.

Avalon did eventually sell $260 million in high-yield
bonds, though, before selling the entire company to Charter Communications. Millennium
said it does not even plan to try again.

While some cable bond issues have proven popular -- Charter
completed a $3 billion bond offering earlier this year -- Millennium backing out partly
reflects a growing concern about competition overhanging smaller operators.

"Our biggest concerns were overbuilds and the threat
from much larger competitors," Moody's Investors Service Inc. vice president and
senior media and telecommunications analyst Russ Solomon said. "As a result, we rated
Millennium at the low end of the industry peer group. The market said they wanted to be
paid for the added risk."

Millennium's largest market, near Baltimore, is close
to major clusters owned and operated by Comcast Corp.'s Jones Intercable Inc.
subsidiary. In fact, part of Millennium's system in Anne Arundel County, Md., is
shared with Jones. Comcast, Solomon said, could easily come in and underprice the
competition to establish itself in the market.

Millennium's private cable systems in Washington state
also face competition from AT&T Broadband & Internet Services.

Sanders disputed the effect of competition on his business
and on the bond pricing. "It was all market conditions," he said. "Only the
guys that had to do [bond offerings] did them. There's no liquidity out there at
all."

Sanders noted that German pay TV company The Kirch Group
pulled a $1.1 billion junk-bond sale early in September, affected by adverse market
conditions.

Insight's $200 million bond offering went off without
a hitch last week. But with about 1 million subscribers, ties to AT&T and high-quality
assets, that company was an exception to the rule.

And even Insight's bonds were priced at about 9.75
percent, which, Solomon said, was relatively high for a B1-rated offering.

Solomon added that the bond market might warm up to cable
after Charter completes its initial public offering in October. Depending on how well the
Charter IPO does, it might give the bond market added confidence in cable.

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