Media companies were already facing an economic slowdown before Sept. 11. But now, following the terrorist attacks on the Pentagon and World Trade Center, investors are trying to figure out just how much worse things can get.

Neil Begley
Senior Analyst
Moody's Investors Service
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To help answer that question, talked with someone who has to pay extremely close attention to the money flowing into and out of media firms: Neil Begley, a senior analyst at credit-rating agency Moody's Investors Service. A seven-year veteran of Moody's, Begley rates the investment-grade debt of media, entertainment and sports firms ranging from AOL Time Warner ( AOL) to YankeeNets.

Begley, previously a media and telecom banker at Barclays Capital and a CPA at KPMG, says a major effect of the terrorist attacks on the media industry is a new note of realism among economic projections.

TSC: Where are the strongest repercussions of the terrorist attacks in the media industry?

Begley: This is probably going to be the worst year, year over year, for advertising since World War II. Up until now, for advertising as a whole, there may not ever have been a recession -- the worst case was like 0.1% either up or down. That was as close as we ever got. But this year, I can guarantee you, there will be an advertising recession, first time ever. It'll be most severely felt in print and television.

Before the World Trade Center tragedy occurred, we had already become, I think, more conservative in our thinking about the potential for a more negative impact on a lot of these companies. Our concern really was that the recession that hit national advertising might migrate into the local advertising realm. And also that there were some companies that probably had a significant amount of dry powder to weather it. And there were others that did not.

We've changed the outlook for Washington Post ( WPO) to negative; we changed the outlook for A.H. Belo ( BLC) to negative; we've changed the outlook for Hearst-Argyle ( HTV) to negative; we have Disney ( DIS) on review for downgrade. And we're still looking at a few others.

TSC: When were these changes made?

Begley: They were done probably in the August or early September time frame. It was before the World Trade Center attack .

TSC: And are you making further ratings changes now?

Begley: We're not acting upon isolated incidents such as what happened at the World Trade Center, what the impact of that might be on a company. We're basically looking at: All right, what is the impact on the economy? What will that mean over the next one to two years for these companies' businesses? Will it make it even more challenging for them to achieve numbers and to reduce leverage and things like that? ... Do they have any nonstrategic assets or investments they can sell? How much discretion is there in their capital spending? Going through all that analysis could lead us to taking other rating actions -- following negative outlooks with downgrades. Anything in that realm is possible.

TSC: What does the impact look like for the next year or two?

Begley: Well, I think that it entrenches our thinking further, the concerns we had about the local economy. And further retrenchment in the national economy? Our concerns are firmed up there . Because before, companies were challenging our feelings about that.

I just find it very interesting to hear -- after an eight- or nine-year bull market, after a two-quarter slowdown, and without even having ... a recession yet -- companies are already talking about turnarounds. And I find that very interesting. Why would they think we'd turn around so quickly? What is the impetus? I couldn't see anything on the horizon that might lead us to believe there might be a quick turnaround.

Certainly, next year you do have the Winter Olympics, which should help some advertising on the television front. Politics obviously helps as well. But we saw nothing else that really could be meaningful in the economic forecast to get us comfortable that the economy was going to grow at a significant pace again. And so I think now we're even that much more comfortable with our initial concerns.

TSC: Let's talk about the cable industry specifically for a moment. How is that faring?

Begley: I think that the cable industry will weather the current environment pretty well.

I think over the last 10 years, the cable industry has faced two other significant hurdles, if not three. The first ... was in the early '90s, where much of the industry was heavily levered and banks pulled back on providing credit to all companies that were considered highly leveraged transactions, which included the cable industry -- and there was a crunch. That occurred around the same time, or if not, just before, there was cable reregulation by Congress.

And that had an immediate impact on cash flow and cash-flow growth, and that scared off a lot of investors as well. So I think those were significant hurdles that had a significant impact on liquidity that I would not necessarily think will absolutely impact all cable providers.

Even if there is constrained capital, a lot more of the cable systems in the U.S. belong to companies that are presently investment-grade companies. So they are much stronger companies than they were eight or nine years ago.

There was also a recession around that time, but I don't think that had a major impact on the industry. Generally, cable is considered to be somewhat recession-resistant. And that has been because it is not dependent upon cyclical advertising. And it is considered a fairly inexpensive form of entertainment, one which would probably be one of the last ones that would be curtailed by its users. That has changed a little bit -- anywhere from 5% to 10% of revenues for cable companies now have advertising associated with it. So there is a little bit more exposure than there had been. But we're still talking about a very small portion.

TSC: What about the various advanced services that cable companies are offering: high-speed data, additional channels delivered digitally, video on demand -- what do you expect to happen with the supply and demand of those?

Begley: I think investments into new types of services that have not yet taken off will face the most challenge -- the ones with the greatest uncertainty for the demand. And that would include things like video on demand. It would also include things like telephony -- which require a lot of capital expenditures. ... I think there may be a slower rollout of those types of products than would have otherwise been envisioned.

With regard to digital cable and high-speed data, they were already too far into that to slow it down. There's a lot of demand. It can be very profitable with certain penetration levels achieved. And also, more importantly, they are considered a defense against direct broadcast satellite (DBS). And DBS was sort of the third hurdle for the industry to overcome.

TSC: Any further thoughts about the media sector in general?

Begley: I think most people are expecting a U.S. response to the atrocity in New York. From a media standpoint, there's not only the impact of a reduction in revenues, but there's a high cost to covering that news. And from a market standpoint, there's no way anyone can gauge what that's going to be.

You expect these companies to do their professional best at providing information to people. But if this is something protracted and drawn out, there could be additional costs as well, which also could have an impact on cash flow.

And the last comment I'd like to make is there are some companies thinking about being patriotic and buying their stock back. I don't see anything patriotic, frankly, in buying stock back. You're not buying U.S. War Bonds; you're not buying the S&P 500, trying to prop up the stock market. And two days later, the stocks might just fall anyway. So we view that as an absolute negative for companies to be in the market at this juncture buying their stock back, rather than possibly paying down some debt and increasing the amount of liquidity they have.