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Cable TV operators channel efforts into boosting cash Print E-mail
Tuesday, 28 July 2009

By Marine Cole

With the freeze in bank lending, scores of U.S. companies have been forced to guard their capital. Often, such a stashing of cash—either by cutting costs or reining in R&D—raises questions about a corporation's ability to exploit new opportunities.

But that's not the case for Cablevision Systems Corp. or other cable vendors. These businesses have been able to adjust their spending—without risking losing market share. Why? Because the industry enjoys huge barriers to entry, all thanks to the geographic licenses that state and local authorities grant them. Thus, there are few rivals to steal away customers.

Absent competitors, cable operators have substantially boosted their free cash flow (after dividends and share repurchases) over the last few quarters, according to a report by RBC Capital Markets.

“Cash flows have improved even with revenues falling due to a dramatic pull back in capital expenditures, less share buybacks, decreased dividends, and lower taxes,” said Ira Jersey, head of the U.S. interest rate strategy group at RBC.

The numbers tale the tale. Total capital expenditure of cable companies has fallen to about $300 billion in the first quarter of 2009. That's a huge reduction from Q1 in 2008, when cable operators laid out $1 trillion in capex.

The trend even prompted RBC's Jersey to recommend that bondholders cautiously return to investing in the corporate bonds of cable companies. “With corporate cash drain improving and management concerned about survival, we believe that spreads are closer to fair value than they were just three months ago.”

From a credit perspective, this is good news: With cable companies holding more cash, bondholders feel more confident that these businesses will be able to make interest payments and repay their principal at maturity.

That optimism is reflected in improving credit ratings. Fitch Ratings, for example, recently upgraded Cablevision to BB- from B+, mostly due to improved liquidity position, financial flexibility and Fitch’s expectation of sustainable free cash flow generation. Cablevision’s capital expenditures have declined by about 5% year-over-year, while its free cash flow has more than doubled during the first quarter of 2009 compared with the same period a year ago.

Such figures are good news for existing lenders to Cablevision, which is improving its credit profile by decreasing its debt load. Cablevision’s leverage for the 12 months ended March 31 was 5.14 times earnings before interest, taxes, depreciation and amortization. That's down from 6.6 times earning at the end of 2006. And Fitch expects the ratio to fall to 4.9 at the end of 2009, due to lower debt levels and ongoing EBITDA growth.

So what happens to Cablevision once the recession breaks?

“When the economy comes back, capex will automatically increase,” said Michael Weaver, an analyst with Fitch. “I don't think the current reduction in capex will put them at a disadvantage. That will trend with the economy.” 

Indeed, Cablevision, as well as other cable companies, tend to adjust capex according to the numbers of subscribers to their digital services. When that number decreases, so does capex. Once it rises again, cable companies increase capex.

Unlike companies in more competitive industries, cable operators don’t risk losing business in the bargain. 


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