The flight of investors away from junk bonds last month
jolted some cable-related deals, and it could depress big deals for weeks to come.
Because cable's fundamentals are strong -- as shown by
the relative stability of cable-stock prices -- most deals that might have been paid for
with high-yield debt securities can still get done with bank financing, especially if
buyers are willing to put in more of their own money, industry experts said.
Many noted that billionaire Paul Allen, for example,
probably wasn't planning to use junk bonds in his cable acquisitions, so his plans
shouldn't be affected.
But the high-yield market had been very good to buyers and
sellers in cable, according to these executives. With junk bonds, acquirers can borrow
more, relative to their annual cash flow, than they could get from banks.
Junk-bond sellers also have more time before they need to
start repaying principal, and not just interest, which can give cable-system buyers the
time that they need to do system rebuilds or to carry out other big-ticket capital
projects, financiers said.
The differences in those terms could mean the difference
between paying 10 times annual cash flow for a big cable property or paying only eight
times, bankers and cable finance executives said.
So if that market doesn't come back as soon and as
strong as many predicted, its absence could affect how much some buyers can afford to pay
for cable systems.
That could be bad luck for, say, Buford Television Inc., if
some bidders on that 178,500-subscriber MSO, which is currently on the block, decide that
they can't justify going as high as they might have if the high-yield market had been
there. However, one broker who is not involved with that sale said it could take months to
close, and the high-yield market could easily be back by then.
That cable broker also said last week that there was no
sign yet that the high-yield troubles have affected the private-sale market for cable
systems. Several deals have been announced since the high-yield market went south,
although not one was a blockbuster.
"I am running an auction right now that's going
extremely well," for a property worth about $27 million, the broker added.
"Multiple bidders, a great process, a great price."
The last high-yield cable deal to get done was by Insight
Communications, which bought a 75 percent stake in Coaxial Communications'
91,000-subscriber cable system in Columbus, Ohio. On Aug. 21, Insight completed two bond
offerings totaling $170 million to pay for the deal.
"We could not get a Columbus done today," Insight
executive vice president Kim Kelly said last week.
The high-yield market dried up at a time when Avalon Cable
was making its first big acquisition -- the $435 million buyout of 210,000-subscriber
Cable Michigan Inc. Avalon would have tried a high-yield securities sale, but instead,
Lehman Bros. Inc., a partner in the deal, is putting together a one-year "bridge
loan" in anticipation of raising permanent financing when the junk-bond market
"Knock on wood, it's worked out well for
us," Avalon chairman David Unger said. Avalon, backed by media investors Abry
Partners, has some smaller-scale acquisitions in the works that won't require junk
bonds. But any big acquisitions would probably have to wait until high-yield sales are
possible again, he said.
Market conditions could also crimp some newcomers -- such
as turnkey Internet-service providers -- with business plans that require significant
capital expenditures to help small cable operators get into the high-speed-data business.
That, in turn, could make it tougher on those small cable operators, although executives
at several of those turnkey shops said their financing is solid.
At the same time that Coaxial and placement manager CIBC
Oppenheimer were shopping that deal, SoftNet Systems Inc. was trying to sell $150 million
in bonds to finance its ISP Channel's business plan.
SoftNet's timing wasn't as lucky as
Insight's: It was forced to withdraw the offering and to seek other financing
SoftNet chairman and CEO Lawrence Brilliant said last week
that his company had secured commitments to sell $100 million of the bonds, and it was
hoping to close the deal the following day. But the Dow Jones Industrial Average plunged
by more than 300 points, and the high-yield market dried up.
"The timing was terrible," he added.
For ISP Channel -- one of several relatively new companies
that provide the equipment and absorb other start-up costs for cable operators to start
offering high-speed-data services -- the high-yield market was the way to go, Brilliant
It provided a way for a small company, with big
capital-spending requirements, to raise a lot of money all at once, without having to sell
off most of the equity in the company.
Brilliant said the company is confident that it can still
raise what it needs by selling some equity and securing some credit lines. (Much of the
$150 million was slated to go toward paying back interest, so SoftNet is only looking for
about $86 million now, Brilliant said.)
SoftNet took an important step earlier this month, when an
existing investor put $15 million more into the company through a private-equity purchase
of convertible preferred stock. That bought some time and allowed the company to negotiate
from more strength. But the current owners inevitably will suffer dilution when the
alternate financing finally gets done, Brilliant said.
Brilliant added, "The moment the high-yield windows
open, I'm going to be like a bettor at the track, standing in front of those
mutual-fund windows, because that's the right way to finance this company."
Eventually, money will flow back into high-yield offerings.
The initial-public-offering market had also shut down, but online auction house eBay Inc.
broke the ice with a hugely successful IPO last week.
When high-yield activity resumes, several bankers at a
recent Kagan Seminars Inc. conference said, cable offerings should do well because the
industry doesn't have a lot of international exposure and its cash flows are
relatively predictable, even during economic downturns.
The industry's strength also enables it to get bank
financing, even if the prices have gone up a bit, and even if the terms may be tougher
than they were before the high-yield market dried up, bankers and other industry experts
"The banks are still there with the money for the
cable industry," said Phyllis Riggins, senior managing director at NationsBanc
Montgomery Securities Inc. "We're thrilled with the prospect of taking cable
deals out in this market. We think that they'll do great."