Analysts on the buy- and sell-sides say the carnage in European cable debt has created buying opportunities in German cable companies eKabel (B3/B-) and Callahan (B3/B-) (both are senior debt ratings). Frank Knowles, an analyst at Merrill Lynch in London, explains that a German government entity--which would later become Deutsche Telekom--owned a large national network of cable systems for the entire country in the 1970's, and has recently sold portions of its interest in several regions. As a result, eKable and Callahan have been able to buy into an already existing customer base, and to gain scale without formally acquiring other companies. Other factors, such as the density of the population and the fact these companies have more conservative capital structures, should lead to significant price improvement over the next couple of years, he says, once investors become comfortable with their business plans.
Jeff Lovell, a buy-side analyst at Conseco Capital, says the Carmel, Ind., firm has been underweight in European cable, but is looking at the whole sector with a fresh eye. It is attracted by the potential for equity-type returns, but is wary of equity-type risk. He notes that European cable companies have a much greater opportunity to grow average revenue per user than those in the U.S. He has looked at Callahan, and is getting up to speed on eKabel, though concerns about weakness in the German economy give him pause. "We're not sold that you get par back, but at the levels the bonds are trading at, you could be compensated."
As of last week, Callahan 14% senior notes of '10 traded at E60, after being at par May 28. During the same time frame, the eKabel 14.5% senior notes '10 fell from E99 to E55. For European companies outside Germany, the story has been much the same. NTL Communications 12.375% senior notes of '08 (B3/B-) had fallen from E90 on May 28 to E57 last week, while United Pan Europe Communications 11.25% senior notes of '10 (Caa1/B-) had gone from E59 to E23.
Knowles says there was no single catalyst for the sell-off, which he attributes to "an accelerating cycle of bad sentiment in both the equity and bond markets, which fed off of each other." This was accompanied by "a general realization that access to the capital markets was getting less and less possible for these capital-intensive companies."
An analyst at MetLife says the debt-to-subscriber ratio of German companies is not as high as others in Europe. He also believes German regulators are more inclined to encourage competition than those in other European countries, though he is unaware of any potential regulatory obstacles at the moment. "Given the current environment, any bad news is going to have an oversized impact on prices," he says, adding, "the German companies trade at ridiculous levels." The analyst says MetLife holds Callahan paper, but not eKabel. He would not explain why, nor would he discuss whether MetLife plans to add to its allocation going forward.
Christian Rauch, an analyst at Moody's Investors Service, sounds a note of caution. "These operations are funded to pursue their business plans. However, the depressed trading levels are indicative of the very considerable risks of executing those plans, and heightened investor awareness of those risks over the last few months."
