Cable television shareholders are putting a lot of stock in Comcast's (CMCSK) bond ratings.
On Monday afternoon, Moody's Investors Service became the third ratings agency to assign an investment-grade rating to
, the company slated to be formed from Comcast's merger with the AT&T Broadband unit of
. By avoiding the junk-debt label for the new entity, say equity analysts, Comcast avoids a major obstacle on its way to smooth completion of its deal with AT&T.
Clouding the situation somewhat for investors, however, Moody's did assign a junk-level rating to Comcast in its current incarnation, sending the company's shares down at the end of the day. But a Comcast source argued that the downgrade was irrelevant, because the company is about to cease as a debt-producing vehicle.
Comcast and AT&T have said they hope to close the AT&T Comcast transaction by the end of the year. On Monday, Comcast's shares fell $1.50 to close at $20.86, down 49% from their 52-week high. Much of that decline came near closing, after the headlines from Moody's had become public.
The reports from the ratings agencies, as well as the equity-side reaction to them, underscore the crucial role of credit ratings in the debt-nurtured business of operating cable TV systems. As demonstrated by the bankruptcy filing of
, the possibility that a cable company might not be able to repay its debts is no longer merely a hypothetical situation for shareholders.
Investors are paying close attention to ratings agencies' assessment of cable companies' creditworthiness. The perceived riskiness of AT&T Comcast's debt -- the possibility that the deal would drag Comcast's current investment-grade ratings down to junk status -- has weighed on the stock.
In a note issued Monday morning -- before the Moody's report was issued -- Banc of America Securities analyst Doug Shapiro termed "material" the possibility that Moody's and its fellow ratings agencies would assign an investment-grade rating instead of a speculative-grade rating to AT&T Comcast. "It should prevent a potential liquidity crunch," Shapiro wrote, and should free Comcast from having to seek new financing to complete the transaction, eliminating a financing risk and the risk of further delays.
recently illustrated that a company can suffer just as much from the contractual dominoes toppled if its debt rating is cut from investment grade to junk as it will suffer if it is unable to meet is obligations. As Vivendi CEO Jean-Rene Fourtou said in a news conference last week, "A liquidity crisis is a phone call from a ratings agency."
Though not junk, Moody's rating doesn't leave AT&T Comcast with much breathing room. The ratings firm assigned a Baa3 long-term senior unsecured rating to AT&T Comcast's new $12.8 billion bank facilities. Moody's downgraded the long-term senior unsecured debt ratings of Comcast Cable Communications and certain related entities from Baa2 one notch to Baa3, the lowest rating above the junk level. The rating of parent Comcast dropped a notch from Baa3 to a junk-level Ba1.
Moody's says it based its rating action on the view that Comcast "faces a significant challenge" in integrating AT&T Broadband into its operations. Among the issues cited by Moody's is that AT&T Broadband is 1 1/2 times Comcast's size, has been experiencing significant subscriber erosion, has the lowest operating margins in the industry and requires a significant upgrade of its network. On the bright side, says Moody's, Comcast has a strong management team and a good record of integrating smaller acquisitions.
Last week, AT&T Comcast's senior unsecured debt was rated BBB by Standard & Poor's -- two notches above junk -- and BBB by Fitch Ratings, also two notches above junk.
Along with Moody's rating for AT&T Comcast, says Comcast, these ratings mean that AT&T Comcast will be able to access the full $12.8 billion in its bank facilities.
Noting the junk rating for Comcast in its current form, the company said in a statement, "Comcast does not anticipate substantial debt issuances at the Comcast Corporation level at any time in the near future."