Rather than happily looking forward to the new year, three MSOs specializing in rural cable are facing deadlines from their lenders that could trigger serious financial crises.
The companies, Classic Communications, Galaxy Telecom and James Cable, are all being hammered by competition from DBS, scaring off new investors in what is already a frosty market for selling stock and junk bonds. Whereas small-town "classic" cable systems were considered the most stable end of the business, operators are stuck with antiquated plants that carry too few channels to keep customers from peeling off to DirecTV or EchoStar.
At Galaxy, for example, 87% of its systems are too small to be upgraded.
Just a year after going public, Classic Cable, with 404,000 subscribers, is in a pinch, at risk of slipping into technical default on $164 million in bank debt by falling short of fourth-quarter cash-flow targets demanded by bank lenders. The company is scrambling to sell its most liquid asset: antenna towers in about 350 towns scattered across nine states. With cellular companies hungry for places to establish cell sites, Classic hopes to raise about $70 million.
Galaxy Telecom is worse, forced by nervous banks to skip interest payments on $120 million in junk bonds. For months 121,000-subscriber Galaxy has promised lenders that it would sell cable systems to repay debt, but the company has seen two deals collapse.
Eight years after emerging from Chapter 11, James Cable is flirting with financial disaster again. Sliding cash flow and customer counts leave the 70,000-subscriber operator warning that it might miss a $5.4 million bond payment due Feb. 15.
All the companies thought they could finance acquisitions and system upgrades with heavy use of debt, generally 7.5 times annual cash flow. Other operators are trying to keep leverage at five to six times cash flow.
"I think these are companies with overloaded capital structures at a time when that doesn't work very well," said Merrill Lynch media high-yield-bond analyst Orren Cohen.
Classic Communications Chairman Merrit Bellisle blames the Federal Reserve's anti-inflation policies for scaring investors and lenders away from all sorts of smaller businesses. "Alan Greenspan is going to get his wish in spades," Bellisle said. "He's broken the economy and kicking it around like a crumpled beer can."