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Rainbow National Bond Deal Stirs Confusion & Skepticism
12 Aug 2004 16:44 ET

By Liz Rappaport
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Investors are a bit wary of Rainbow National Services' $800 million, two-part offering of senior and senior subordinated notes.

The picture of the company and its future is hard to piece together, and the offering's conditions don't necessarily provide enough protection. Buying the deal is a leap of faith, said investors and analysts - a matter of believing in a start-up idea.

As a spinoff of Cablevision Systems Corp. (CVC), Rainbow National will be a subsidiary of Rainbow Media Enterprises, which will have three of Cablevision's old programming channels under its wing. The new entity is also being used to finance what will become its sister company and Cablevision's spinoff of its direct broadcast satellite entertainment service, Voom, as well as a possible funding vehicle for other ventures down the road.

The Voom satellite service is a virtual start-up, which plans to use advanced technology to provide entertainment to its customers who must have high-definition television equipment.

The proceeds of this bond offering as well as a $950 million bank credit facility are being used to finance Voom, but also to pay down debt at the parent, Rainbow Media Enterprises, leaving Rainbow National starting off with a significant amount of debt, despite some strong assets.

"For our perspective it is a highly speculative venture and rated accordingly," said Russell Solomon, senior vice president following high-yield media companies at Moody's Investors Service. The senior notes are rated B3 by Moody's Investors Service and the senior subordinated notes are rated Caa1. "The hope is that more consumers purchase high-definition television sets and that the demand will be there for Voom... But it is risky... The company is planning to spend a lot of money to try to make a go of this business."

Standard & Poor's assigned a triple-C-plus rating to both parts of Rainbow National's bond offering, and a single-B corporate credit rating to Rainbow Media Enterprises and Rainbow National, with a negative outlook.

But Moody's Solomon noted that Cablevision's management, which started the satellite business, has a history of trying to get out ahead of a trend or technological development. Cablevision itself is an example of that, said Solomon. "They are among the founding fathers of the cable industry," he said, referring to Cablevision's chairman and founder Charles Dolan and its chief executive James Dolan.


Confusing Covenants

The bond offering itself is also slightly confounding, said investors. Unlike most 144a private placement deals, this one comes without any registration rights. This typically means that it is less liquid in the secondary market as some investors are prohibited from owning offerings without registration rights, said dealers.

It also was proposed with relatively loose covenants, or protective clauses, said investors, particularly for a low-rated company with such an uncertain future. Investors say that the covenants are being tightened, although no details were available.

Moody's also noted that while Voom is funded through at least 2005, according to Rainbow National, the cash flow from Rainbow National's content assets could be hijacked to fund Voom and other ventures that Rainbow Media Enterprises decides to develop in the future. Rainbow National's programming channels include American Movie Classics, or AMC, Women's Entertainment, or WE, and the Independent Film Channel, or IFC.

In favor of the new company, Moody's noted that Rainbow National has a good liquidity position. "The company is likely to produce around $100 million of free cash flow and will be in compliance with its bank covenants over the next 12 to 15 months."

The offering is expected to take shape as $250 million eight-year senior notes, pricing with a coupon between 8.5% and 8.75%, and $550 million of 10-year senior subordinated notes, pricing with a coupon between 9.75% and 10%, according to IFR Credit. Pricing is expected Friday via lead managers Banc of America Securities, Bear Stearns, Credit Suisse First Boston, and J.P. Morgan.

S&P along with a handful of investors said they are skeptical about the company's prospects given the competitive landscape.

The rating is "dominated by the extremely high business risk of the company's consumer video product, given its late introduction to the market relative to competitors EchoStar Communications Corp. (DISH) and The DirecTV Group Inc. (DTV)," S&P said.

But others said that it isn't an apples to apples comparison as the Voom product is for a more advanced or "early adopter" audience.

Either way, covenants that allow for flexibility in the future might make sense, but are hard to accept because the company's future is so hard to visualize, other investors said. "It is not the easiest thing to analyze," said one investor looking at the deal.

What's more in this week's crowded calendar, investors can be picky. "It is not the only deal in town," said another investor, who isn't buying the bonds.