Press release provided by Standard & Poor's)
NEW YORK, Aug 3 - Standard & Poor's today affirmed its
ratings on RCN Corp. (see list below), and removed them from
CreditWatch where they had been listed with positive
implications.
The outlook is stable.
The CreditWatch placement had followed the October 1999
announcement that Vulcan Ventures Inc., the investment
organization of Microsoft co-founder Paul G. Allen, was making
a $1.65 billion investment in RCN. Although this significantly
improved the company's financial flexibility, the investment
has lead to an acceleration of the company's business plan.
This will expand the number of new markets the company plans to
enter and defer the company's ability to become cash-flow
positive.
About $2.2 billion in debt is outstanding.
The ratings on RCN reflect its favorable business risk
profile, good management, and prefunded capital requirements,
offset by its negative cash flow and high debt leverage near
term. In addition, uncertainty regarding the impact of
competition from larger telecommunications and cable TV
carriers, which are expected to provide telephony over cable
plant, poses a significant challenge longer term.
The rating also takes into account Vulcan Ventures' $1.65
billion investment in RCN, in the form of a mandatorily
convertible 7% payment-in-kind preferred stock, which will be
converted into RCN common stock no later than seven years after
the date of issue. This transaction increased Vulcan Ventures'
ownership interest in RCN to 27.4%, and allows Vulcan Ventures
to appoint two members to the RCN Board of Directors.
RCN's strategy is to provide a bundled package of local and
long-distance telephone, cable TV, and Internet services to the
residential market. This customer base has been largely ignored
by the competitive local exchange companies, which tend to
focus on the business customer. RCN is targeting markets with
high density, favorable demographics, and significant growth
opportunities.
To date, its markets include the Boston to Washington, D.C.
corridor of the East Coast, which includes New York City. In
addition, the company is targeting the San Francisco to San
Diego corridor of the West Coast, and, through its acquisition
of 21st Century Telecom Inc., the Chicago, Ill. metropolitan
area. These markets comprise about 44% of the U.S.
telecommunications market.
The company's advanced fiber optic network, which supports
voice, video, and data services, passes more than 1,051,100
homes and is expected to nearly triple this amount over the
next few years. RCN's goal is to market at least two to three
services per home to leverage the cost of its network.
The company has also entered into joint ventures with
various electric utilities to expedite and share the cost of
the network buildout. These include Boston Edison Co., Potomac
Electric Co., and Southern California Edison. About 35% of the
company's total service connections are on-net (on the advanced
fiber optic network), and more than 90% of total service
connections are anticipated to be on-net within the next five
years.
This should significantly boost cash flow margins. Off-net
service connections include resold telephone services, the
company's wireless video services in New York City, and
traditional cable TV services delivered by RCN over its coaxial
cable properties in Pennsylvania, New York, and New Jersey.
RCN competes with the larger, better-financed incumbent
local exchange and cable TV companies by offering a bundled
package of services that provides customers services at a
discount. By being first to market with a bundled package of
services offered over a new fiber network, RCN has a two to
three year lead over its competitors.
The company believes its overbuild strategy will be
successful due to its focus on dense urban and suburban
corridors, because more densely built networks can be
profitable at lower penetration rates. Still, longer-term
uncertainty exists regarding the impact of competition from
carriers such as AT&T Corp. and Time Warner Inc., which are
expected to provide telephony along with other products over
cable TV infrastructure.
The relationship with Vulcan Ventures, which has a
portfolio of investments in broadband, media and entertainment,
and technology companies, provides RCN the opportunity to
further leverage its network and provide new revenue-enhancing
services.
In a separate agreement, RCN will participate in a joint
venture with Vulcan Ventures and other related companies to
develop Internet portal services. RCN also entered into a joint
venture with Charter Communications Holdings LLC (majority
owned by Paul Allen), one of the largest U.S. cable TV multiple
system operators.
The Vulcan investment, coupled with an in-place secured
bank line, prefunds RCN's accelerated capital spending and more
aggressive business plan. However, this defers the company's
ability to generate positive EBITDA to 2002.
OUTLOOK: STABLE
The successful completion of RCN's network should result in
an increased number of on-net customers, improving margins and
cash flow over the next two to three years. However, the
accelerated expansion plan and more aggressive capital spending
will weaken short-term credit parameters. Significant cash on
hand provides a degree of interim financial flexibility,
Standard & Poor's said.
RATINGS AFFIRMED AND REMOVED FROM CREDITWATCH POSITIVE
RCN Corp.
Corporate credit rating B
Bank loan B+
Senior unsecured debt B-
Shelf registration preliminary B-
Copyright 2000, Reuters News Service |
