S&P Analysts Like Cables 2001 Outlook


Despite facing their first real threat in years from direct-to-home satellite providers, cable operators more than held their own last year-and more of the same is expected in 2001, said analysts at Standard & Poor's.

In a conference call with analysts and the media last week, S&P managing director of media and telecommunications ratings Richard Siderman said cable has continued to perform well because of stable cash flow and well-protected markets.

Despite direct-broadcast satellite's competitive threat, Siderman said, MSOs fought back with digital cable offerings and high-speed data service to retain and attract customers. But rural operators, who face an even more substantial threat from DBS, may have some rough sledding ahead.

Siderman said the increased capital costs associated with upgrading plant to provide digital service, coupled with a low number of homes per headend, could end up hurting rural operators.

"They may have to delay capital improvements, and that can prevent them from being as competitive as they could be," Siderman said.

Large operators, on the other hand, have shown substantial increases in digital cable and cable-modem subscribers, and that should continue this year. The increased revenue and cash flow that those services provide also helped operators to maintain or improve their credit ratings for the year.

The cable sector is likely to be dominated by issues such as AT&T Corp.'s moves to divest of its stake in Time Warner Entertainment and Cablevision Systems Corp.'s efforts to sell off its Rainbow Media Group programming arm, he added.

"Credit-quality issues in 2001 could be impacted more by [merger-and-acquisition] activity rather than by operations," Siderman said.

S&P caused a stir in August when it placed AT&T Corp. on Credit Watch with negative implications, citing the cable and telephony giant's mounting debt problems. The ratings agency said it wanted AT&T to pare its debt-to-cash flow ratio down to 1.5 times and said the company would have to shave as much as $25 billion in debt to get to that level.

Rosemarie Kalinowski, director of the media and telecommunications ratings team, said AT&T has made great strides in getting closer to that target.

"They have significantly deleveraged their balance sheet and they have a stronger profile," Kalinowski said. "While their ratings remain on Credit Watch, S&P expects [cash flow] to be in the 1.5 times range by the end of 2001."

Kalinowski pointed to AT&T's sale of a 16-percent stake in its wireless business in November to Japanese mobile-telephone giant NTT DoCoMo for $9.8 billion in cash, as well as its recent agreement with Cox Communications Inc. and Comcast Corp. to exchange rights to 60 million shares of Excite@Home Corp. stock for $3 billion in AT&T shares.

"In terms of how far along they are in their deleveraging plan, at this point in time, they are probably close to halfway there, which is a positive," Kalinowski said.

S&P analysts had a less optimistic outlook for competitive local-exchange carriers, which were hit hard last year as available funding began to dry up.

CLEC analyst Catherine Cosentino said during the call that the outlook for those outfits isn't any better this year, as epitomized by Northpoint Communications Inc.'s bankruptcy filing last week.

"CLEC ratings are under heightened pressure," Cosentino said.

Funding problems at Covad Communications Inc. and Teligent Inc. continue this year, she said. Covad has lost its CEO and Teligent recently announced that it only has enough cash to last the rest of the year.

A $250 million equity investment in Teligent from Rose Glen Capital Management last month "only partially mitigates S&P's concerns," Cosentino said.