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Picture clouded for expansion, debt service

NEW YORK — The second uptick in interest rates in as many months has thrown U.S. financial markets for a loop.

Cable operators who are interest-rate sensitive are particularly anxious. The change has muddied their medium-term outlook for expansion and debt service. And the timing is unfortunate, because they already face the bleak prospect of shrinking revenues.

While both stock and bond market participants had expected — and therefore to a large degree had priced in — the March 22 quarter-point increase in the Fed funds rate to 3.5%, the move sparked concern about the Federal Reserve’s intentions.

Wall Street believes rates will continue upward, although the central bank’s ultimate target and preferred pace of reaching that goal have not been outlined by the Federal Reserve.

“The concept of short-term rates moving still higher is rather valid,” says Matthew Alexy, government securities strategist at CS First Boston. “The timing of the next move (is) uncertain.”

Investors reacted more moderately to this rate hike than they had to the first one Feb. 4, when the Dow Industrials sank almost 97 points. Still, the latest move took a higher profile on the consumer front as commercial banks like Chase Manhattan, Chemical and Banc One quickly boosted their prime lending rates by a quarter-point to 6.25%, the first increase since early 1989.

Cablers with floating-rate credit lines based on U.S. rates could get squeezed between the Federal Communications Commission’s recent 7% mandatory cable rate cut and rising interest rates.

“It is like another straw on the camel’s back,” says analyst Oren Cohen at Salomon Bros. He noted that rising rates often prompt weakness in the stock market. That, in turn, dims interest in new issues, cutting off another route for private cablers to raise public money. Cohen expects an increasingly Darwinian environment, where the more financially flexible cablers survive while others undergo consolidation.

Among the survivors will be titans such as Time Warner and Tele-Communications Inc., which refinanced their debt at substantially improved terms over the past few years, locking in lower rates and protecting themselves against future fluctuations. Time Warner managed to lop some $ 3 billion off its total post-merger tab of about $ 19 billion, extending maturities and paring borrowing costs.

The widely publicized battle for Paramount Communications and the high-profile Bell Atlantic-TCI merger plan propelled the entire sector to record highs in recent months. Cablevision Systems reached its 52-week best of $ 72 per share last fall on deal speculation. It has since fallen 18% to $ 58.88 per share on talk it is renegotiating with suitor Time Warner, after the FCC move shrank cash flow projections.

“Historically it was almost as if all cable companies traded at the same (price/earnings) multiple, and I think (now) different assets are going to trade at different multiples,” says Keith Foley, senior vice president at Fitch Investors Service.

“They have different demographics which are going to support different levels of revenue, and it will be interesting to see how much the individual difference among companies and service territories (affects) business and financial risk,” he adds.

Foley expects the double whammy of rising interest rates and falling cable rates to delay decisions rather than change them. That appears to be the case at TCI. Chairman John Malone told analysts last month the new FCC rules would take from $ 100 million to $ 144 million (about 6%-8%) out of annual operating cash flow and announced the suspension of a $ 500 million capital program. Nevertheless, the cabler is moving ahead with video-on-demand tests and a joint venture with Microsoft to develop interactive TV.

For the week ended March 25, TCI closed 13 cents lower, at $ 22.63 per share, and Time Warner settled off 25 cents at $ 41.50. Comcast finished up 38 cents at $ 19.50, Cablevision down 50 cents to $ 58.88 and Adelphia was unchanged at $ 15 .50. Jones Intercable settled up 13 cents at $ 14.50.

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