Maryland Cable: A good idea taken too far

VIEW FROM WALL STREET

November 11, 1990|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- To gain a clear picture of how the financial perspective of the 1980s is painfully, but inevitably, evolving into the 1990s, one need look no further than Maryland Cable, the Prince George's County cable television operator that defaulted on its bank debt late Friday afternoon.

Maryland Cable is a vivid story of a good idea taken too far. For several years, subscribers have been confronting higher fees. And, shockingly, given Americans' supposed addiction to unlimited amounts of television, some subscribers have begun just saying no, or, inferring from the company's recent securities filing, they are doing what amounts to the same thing, but in a more 1990s kind of way -- not paying their bills.

The result is that after a decade of continuous growth, the number of subscribers to the Prince George's County franchise declined about 6 percent during the first half of 1990.

Meanwhile, the other group involved in Maryland Cable's fate, its investors, are, or should be, tallying potential losses. A bank syndicate of secured lenders led by Citicorp spent two weeks locked in discussions with the company's management about waiving principal repayments.

A similar discussion was successful in late September. This time it failed. Only two years after a high-priced buyout, the company is in default on critical debt covenants and is an obstinate banker away from bankruptcy.

On the premise that one thing might lead to another, the Cable Advisory Committee for Bowie has begun to "sensitize" the City Council to the potential for Maryland Cable's bankruptcy, said Gordon Nelson, the committee's chairman.

Among the issues to be considered are revoking the franchise and having Bowie become the operator. "Taking it over would be controversial," said Mr. Nelson, "but you have to keep it out there to see the city has some options."

The credit market was similarly prepared. Early last week, Standard & Poor's downgraded to only a step above default the non-bank debt the company issued to finance the buyout, asserting that even if the company completed a critical restructuring, repayment of principal and interest "would still be in doubt."

Interestingly, though, while default is a certainty and repayment unlikely, bankruptcy is far from guaranteed. That would involve endless litigation, the inclusion of an unpredictable judge and the dispersal of assets.

That may indeed come about, but there's a good reason it won't: Dispersal of assets would be anathema to the company's investors. For, stripped of financial baggage strapped on during the past decade -- baggage that would never be added today -- the company would be profitable, with a sound if not glorious future.

What makes Maryland Cable an interesting case is that it is hardly just another victim of a recession, or of a changing technology, or any other external shift.

On an operating basis, it is a company with an attractive product, minimal production obstacles and consistently good profits. Strip away financing costs and accounting minutiae and about 35 cents of every dollar the company takes in falls to the bottom line.

That's a good margin for almost any business in almost any economic climate. And it is about as good a gauge as one can get of the company's condition, since the losses the company reports quarterly are skewed by numerous non-operating charges relating to the acquisition and the resulting debt service.

For the record, Maryland Cable's revenues during the first half of this year grew 17 percent, to $19.3 million, compared with the first half of 1989. But it still registered a net loss for the six-month period of $11.2 million, up about the same amount, 17 percent.

The reason for the losses in both periods were those other charges, and in 1990 they were higher than in 1989.

To be specific, in the report for the six months that ended in June 1990, there was a charge of $5.3 million for depreciation and amortization, the kind of paper loss that wrecks balance sheets but not businesses. More important was a $12.7 million charge for interest, which includes about $5 million paid in cash. Take away those numbers, and the company does well. Keep it in, and the company is desperate for relief. Suddenly, 35 percent margins aren't good enough.

That this could occur is almost understandable, if not reasonable, given recent history. The medium-sized (77,000 subscribers) Prince George's County cable operator came into being at the beginning of the past decade as cable technology matured, federal pricing constraints died and credit was easy. In the thought process of a financier, that translated to a growing industry with almost unlimited access to capital that could sell a product for ever higher prices to obsessed customers.

Some of the capital went to building cable systems, but as enthusiasm for the industry grew, vast amounts of money were raised just to finance the repurchases of the systems themselves at ever higher prices.

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