RCN renegotiates debt, says it’s on profit course

Cable provider serves Princeton and Montgomery.

Montgomery sees RCN as a cable horror show
By: George Frey
   West Windsor’s RCN Corp., the bundled service provider of cable television, phone and Internet service, announced March 26 it had renegotiated its credit terms and as a result will continue extending its services.
   RCN is the cable provider in Princeton and Montgomery.
   Faced with competition and a general lull in the economy — and in particular the telecom sector — the company has lost significant revenue and did not meet its expectations in the bundled services market.
   At the end of 2001, the company was burdened by $1.9 billion in debt, and its stock was downgraded to a "low junk status" by Moody’s Investors Service in mid-February.
   RCN maintained, though, it is on course to becoming profitable before taxes in 2003 despite its current financial woes.
   Among the provisions of the new arrangement, the company will be able to relax some of the operating and financial agreements with lenders and modify some restrictions that existed under the previous agreement. The company will be able to use $250 million of new funding to repurchase debt, and retain the first $100 million per year from the sale of assets such as real estate, among other provisions of the new arrangement.
   Additionally, the agreement provides the company with new flexibility, such as the ability, but not the requirement, to sell non-core assets, keeping the majority of the proceeds to reinvest in the business and supplement liquidity, the company said.
   "This agreement gives us new and important flexibility to execute our strategic plan," said RCN chairman and CEO David McCourt in a statement released by the company.
   "We will use this flexibility to reach our goals and thrive in this new telecom landscape, which has brought difficulty to so many other companies.
   "The bottom line is that the additional financial flexibility provided by the new amendment allows RCN to continue its efforts to reduce costs, improve operating margins and expand our customer bases in our existing markets. We look forward to bringing more customers onto our network and selling them more bundled services," Mr. McCourt said.
   The loan relaxation agreement hinges on RCN paying a cash payment of $187.5 million on its outstanding term loan and accepting a reduction of $62.5 million in its $250 million revolving loan. The company also agreed not to draw on its remaining $188 million revolving loan for two years.
   The company said it expects higher revenues this year of between $595 million and $605 million, up from the $536.2 million reported in 2001.
   Russell Solomon, a media analyst and vice president with Moody’s Investors Service in New York City, said it was time RCN negotiated the credit arrangements because it was at risk of losing some financial covenants and defaulting on some of its loans later this year. He said RCN still faces major challenges, including its huge debt load.
   "They just took away the most valuable asset they had," Mr. Solomon said, "which was the cash they had on hand. It hurts them (paying off some of the debt), but it needed to be done. It buys them another year, in our estimation. It pushes back the uncertainty date of the company another year. It may be longer than a year, too," Mr. Solomon said.
   Mr. Solomon emphasized that the company has "serious cash flow problems" and that its liquidity is its most important issue now. He said he did not know of any company interested in buying RCN presently, but added the possibility certainly exists.
   Published reports indicated the new arrangement with RCN’s creditors could allow the company eventually to sell its systems in Princeton Borough, Princeton Township and 29 other central New Jersey municipalities.
   Nancy Bavec, a spokeswoman for RCN, said the company has the opportunity to negotiate a joint venture with a California company, which she declined to name. But she said she was unaware of any party interested in purchasing RCN or that the company was seeking a buyer.
   She said the company is comfortable with the current business plan.
   "It’s not unusual for companies to renegotiate with their banks," Ms. Bevac said. "With this environment, post-Enron, we think this is a vote of confidence that our business model can work. RCN adapted much faster than other companies. The banks recognize this is a prudent way to run the company right now."
   Ms. Bavec said there is a clear path to profitability for the company, adding, "It’s up to us." She said the firm needs to stay on course and avoid distractions.
   "We have increased revenues by 32 percent, and not many cable companies have done that lately," she said. "We’ve been able to control spending. We have a lot of challenges ahead of us and we need to focus on them."