US telecommunications companies face risk of ratings downgrades as they race down the electronic superhighway, Moody’s Investors Service Inc warned. It said increased merger activity among telecommunications distribution networks and content providers is raising serious questions about the impact these investments may have on credit quality – and this was before yesterday’s announcement that the leading cable television companies are ganging together to compete with the phone companies – see back. The rating agency said it expects that a large portion of acquisition and investment dollars needed to enter these new lines of business will be funded with debt, which will place growing strain on financial flexibility. Political, judicial, and regulatory policy decisions are likely to continue to accelerate the pace of change in the industry, Moody’s said in its special report on the telecommunications industry. Moody’s cited the Clinton Administration’s enthusiasm for the concept of the electronic superhighway and recent indications from Congress that the telephone and cable TV industries could be placed on a competitive footing. It also cited the Federal Communications Commission’s decision this year to auction off radio spectrum, thereby creating the Personal Communications Services industry, yet another alternative to existing wireline and cellular communications channels. Moody’s reckons these developments will likely spur more companies to make major investments in the emerging multimedia and interactive industry over the next few years. It added that the industry’s increasing volatility makes each company’s future financial performance less certain. Challenges faced by managements in operating these diversified businesses could cause further long-term concerns, it noted. These and related long-term credit issues are likely to cause rating downgrades over the next several years at both the holding company and telephone company level, the Moody’s report concluded.
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