Patriot Media offering could herald more cable deals, Lucent firms

By Paul A. Harris

St. Louis, Mo., Nov. 1 - Patriot Media broke the quiet in Friday's leveraged loan primary market with a deal to finance the acquisition of Princeton, N.J. telecommunications company RCN Corp.'s central New Jersey cable operations.

And Genesee & Wyoming Inc. announced Friday that it had closed on $250 million of new senior secured credit facilities.

Meanwhile one trader told Prospect News Friday that aside from some firming in the paper of Lucent Technologies the quiet in the secondary market was nearly undisrupted.

Patriot Media, the new company which will run the New Jersey cable systems to be spun off by RCN, is expected to launch a $165 million credit facility on Monday, a market source told Prospect News on Friday, adding that Bank of New York is leading the deal.

The facility will be comprised of a $65 million pro rata loan, and a $100 million term loan B; pricing on the term B loan is Libor plus 400 basis points.

The source identified private equity firm Spectrum Equity Investors as the sponsors.

In addition to Spectrum, cable entrepreneur Steve Simmons was reported to have a stake in the deal according to a press release from the company, which added that Simmons will serve as chairman and CEO of the new company.

"Because the RCN business plan was founded on building our own network in major metropolitan markets and bundling phone, high-speed Internet and cable TV, Central New Jersey's systems - which were built years ago by others - were not a core part of our strategy," said RCN Chairman and CEO David C. McCourt in the release. "The sale makes very sound strategic sense for RCN. Although a great market and cable property, Central New Jersey wasn't critical to our overall plan, and we can use the nearly quarter of a billion dollars in proceeds from the sale to accelerate our growth in other markets."

One bank loan investor who spoke Friday with Prospect News also expressed the point of view that the Patriot Media deal makes sense.

"I suspect we're going to play in Patriot," the source said. "It makes some sense because you have a telecom company in the form of RCN selling its cable properties. And it's fabulous demographics; there are lots of wealthy people in that area.

"I'm seeing a number of proposals from cable, kind of as a follow-through to Patriot," the investor added. "There are a number of spin offs from other cable companies, or from people that own cable properties, in the works.

"There is going to be some activity in some of the smaller systems - no mega Charter-like transactions - but some $200-$400 million bank facilities that are in the proposal stage right now."

With the beating investors have taken from some infamous telecom names, this source added, pricing Patriot and its expected successors may prove to be something of a challenge.

"How do you price a cable credit today?" this investor asked rhetorically. "There has not been that much new issuance for nine or 10 months. So where do you look to find the value? You can look at all the secondary prices on cable credits. But the real question, given the market and peoples' exposures to Adelphia and Charter, and the mark-to-market losses they've taken there, is how crazy are they going to be to get into the next new cable deal?"

With regard to this investor's appetite, the size of Patriot and the size at which its successors are expected to come is a plus.

"I'm size-sensitive," the source said. "To get the billion-dollar deal you're going to have to price it to the margin. If it's $200-$600 million maybe you can price it a little inside of that marginal dollar.

"It really depends on the size of the deal you're trying to push into the market. Despite some of the Charter issues and Adelphia issues I think most people are still reasonably okay with the sector. There are still a couple of issues they are dealing with but I think in general people still believe in the business model."

As evidence to support the contention that the cable/telecom sector might indeed be undergoing meaningful consolidation, and that investors are once again starting to eye it the source pointed to a story in Friday's Wall Street Journal reporting that fiber optic network carrier Level 3 Communications is trying to acquire the assets of Internet services provider Genuity Inc. for more than $100 million, with money from an investor group that includes Warren Buffett.

"People who have totally upgraded their systems have seen huge sales in their broadband product," the investor said. "It's been beyond peoples' expectations.

"Once you bury this stuff it does not disappear. At a certain price this stuff is starting to make sense. And I think that it means something when Buffet's in there buying a fiber optic."

In other primary market activity Friday railroad operator Genesee & Wyoming Inc. announced in a press release that it has closed on $250 million of new senior secured credit facilities. The deal has a $223 million revolver and a US$27 million Canadian term loan, each maturing in 2007.

The release also stated that under the terms of the financing, Genesee & Wyoming may expand the size of the facilities to $350 million on a best efforts basis.

The company intends to use the $250 million to refinance approximately $100 million of existing debt at its U.S. and Canadian subsidiaries. The remaining $150 million of unused borrowing capacity will be available for general corporate purposes including acquisitions, the release added.

Fleet National Bank underwrote the facilities and acted as arranger and administrative agent. The syndicate included The Bank of Nova Scotia, JP Morgan Chase Bank, LaSalle Bank, Sovereign Bank and Wachovia Bank.

The release also stated that the financing was oversubscribed and a total of 16 banks participated in the facilities. All six of Genesee & Wyoming's existing lenders recommitted to the transaction.

Meanwhile in Friday's secondary market activity a trader told Prospect News of seeing movement in only one company's paper. Lucent, the source said, had firmed and was trading "around 90."

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