Israeli rating company


today announced that the risk factor in Israel's multichannel television has increased. Maalot therefore downgraded the rating of

Matav Cable Systems

(Nasdaq:MATV) bonds from AA- to BBB+.

Matav issued NIS 200 million worth of debt bonds.

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Maalot wrote that multichannel television in Israel and around the world is characterized by high leverage and negative cash flows, because of heavy investment in infrastructure. A heavy regulatory hand has increased the uncertainty factor, Maalot writes, not to mention the onset of competition by the YES satellite television company, which commenced operations in July 2000.

The cable companies have another problem with rigid spending needs. Moreover, the touted merger of Israel's three cable companies which have shared out the country between them, thus eliminating potential competition is on ice, while they all have to spend relatively heavily on infrastructure and content.

Maalot does not see the sums Matav spent on its Internet-content subsidiary Nonstop generating revenue any time soon. But Nonstop will require further cash infusions.

Although competition will stay fierce in the multichannel television sector, Maalot does not see great potential to add new subscribers. New subscribers will come mainly as a function of population growth, the rating company writes.

Maalot points out that Matav's average income per subscriber dropped by 9.6% in 2000 compared with 1999. Moreover, when it begins to provide tiering individually tailored packages of channeling its income per subscriber will drop even more. Today only YES is allowed to provide tiering, in which a household chooses a limited package of channels, and pays accordingly.

Meanwhile, content costs have soared. Matav pays $13 per subscriber compared with $5 years ago. The three cable companies have 1.2 million subscribers, extrapolating to content costs of $187 million a year. The cost of content is not expected to drop for now.

Meanwhile, YES is expected to reach balance when it ropes in 250,000 subscribers. The company is expected to end 2001 with 180,000 subscribers. The company began its life scrabbling for working capital. That prevented it from fully exploiting its exclusive right to provide tiering until April in order to expand its market bite, Maalot writes. But it foresees that changing as YES reaches new financing arrangements, and as its parent companies including the phone megalith Bezeq help it penetrate the market.