TCI Investors Drive Stock to Four-Year Low; Downgrade Feared
Nervous investors for weeks have been bailing out of the stock and bonds of Tele-Communications Inc., and on Thursday they drove its share price to a low not seen since the government capped cable rates in 1992 and constricted the industry’s growth.
And some traders say the situation could get worse, meaning that TCI will have to spend more money on future borrowing, drawing cash away from new businesses that are considered a key to fending off competitors.
“It could get uglier if the debt rating is downgraded, as many expect,” said one bond analyst.
On Thursday, TCI’s common stock fell 50 cents to close at $11.625 on Nasdaq, the lowest since 1992 and down nearly 50% from its 1996 high of $22.375 after deregulation in February allowed cable companies to raise rates and move into the telephone business, and phone companies to deliver video services to households.
The entire cable sector has since been battered by Wall Street because of worries that the industry is no match for well-funded phone companies. Cable operators, already saddled with heavy debt, are taking on more to upgrade their systems.
Last Friday, Standard & Poor’s warned investors that it was considering joining other rating agencies in downgrading TCI’s debt rating to below investment grade if the company doesn’t reduce its debt levels.
The rating agencies worry that investments by TCI to upgrade its cable systems to offer new digital, Internet and telephone services are giving the company less money to service its debt, putting bondholders at higher risk.
Many mutual funds, fearful of a downgrade, sold their TCI bonds this week, depressing prices.
Analysts say others could bail out if Standard & Poor’s acts. Many insurance and state pension funds are not allowed to invest in so-called junk bonds, which the TCI debt would be considered if it were downgraded.
For the first six months of the year, TCI spent more than $1 billion on debt interest payments and nearly twice that on capital expenditures. Its cash flow was just over $2 billion.
Investors also panicked this week after reports that the company had suspended equipment shipments from its major suppliers. Confused investors suspected a cash crunch, although TCI said the moratorium on purchasing stemmed from a new centralized inventory management system that was allowing the company to shift equipment from areas of surplus to meet shortages elsewhere.
TCI appears to have plenty of cash, according to analysts. The Englewood, Colo.-based company, the nation’s leading cable operator, reported third-quarter results Thursday showing that cash flow--the amount of money the company has to spend after paying overhead and expenses--grew 12% compared with the same period a year ago, to $591 million. That is within the range of analysts’ expectations.
But expansion of its services drained $21 million from cash flow. That helped increase the company’s debt-to-cash-flow ratio to 5.99, giving bondholders little confidence that TCI would hit any time soon the 5.5 ratio required by Standard & Poor’s to keep an investment-grade rating.
The company said it may reduce its purchases of new cable systems to keep debt--now at $12 billion--from rising, and analysts said TCI could spin off certain businesses, such as its At Home Internet service, to reduce leverage.
While the company could also increase cash flow by raising rates, TCI’s latest quarter demonstrated that customers are more sensitive to cable price hikes than many thought. TCI lost about 70,000 of its 14.5 million subscribers as a result of rate hikes of about $2 a month.
Some analysts say digital satellite services such as DirecTV are taking more customers away from cable than expected. Market leader DirecTV recently hit the 2-million subscriber mark after launching just two years ago.
James Gorman, a bond analyst at Lazard Freres, says cable has a price advantage over digital satellite that it will keep even after it rolls out its digital set-top boxes over the next several years.
What is more, some analysts believe cable will come out on top in the competitive battles with phone companies.
“If there is no threat to the monopoly, cable doesn’t need to be in such a rush to roll out new services,” Gorman said.
He said cable’s biggest problem is the lack of credibility from promising growth from new services that have never materialized.
