had approximately $1.95 of debt per dollar of revenue as compared to 16 e:7 for the broadcasters.

In such a highly leveraged industry as cable television, what might be ertel ered small changes in costs can have a major impact on net income atl quently on the ability to raise additional equity capital, which in turn prove the base for additional debt financing.

Becker Communications, and its affiliates, are in continuing contact wo lenders to the CATV industry and regularly compile statistics on the ava of debt and equity financing. Within the last several months, in otte with a report which was submitted to the Federal Communications Cor. we have contacted the leading lenders to the industry and have developes, sta tles on capital availability in 1975 and 1976 from 32 commercial banks lo 2 ** mediate term lenders and 34 insurance companies.

The lenders included in this survey have provided a substantial porti total available debt financing for CATV construction and operation. Ace7274 their projections as to future financing plans provide the best and most autem, a tive indication of expansion prospects for the cable television Industry At of this report is attached as Exhibit II. Our survey showed the avail approximately $185 to $200 Million in each of the next two years, dependent up what assumptions are made as to improved profitability of specific firs the industry

While it is difficult to accurately project the true capital requirements * ta CATV industry over this time frame, we believe this level of financing in inje quate to provide for any substantial expansion of service or construction of ten plant facility. As a reference point, under Proposed Regulations of the Folies Communications Commission, a large number of cable con.panies IV.DE TE top 100 markets would be required to make substantial expenditures on ex ** plant in order to bring their systems in compliance with the Com Rules on channel capacity and two-way communication capability – T» M tional Cable Television Association has estimated the cost of this upera e gram to be approximately $423 Million, if completed by the Commiss, 2x Pul line of March 31, 1977.

If the cable television business is to raise even a fraction of the capitale mated to be necessary before it comes into compliance with the Commission « r, es and builds substantial additional capacity, it must become a profitable at Exhibit I shows, however, that the nine leading CATV colapalles ¦ st of approximately $16.3 million in 1974. Obviously, these results must 1. before substantial new capital will become available.

This is not to say that the nine leading companies whose results are summar sed in Exhibit I represent a cross section of the entire industry. Most CATV (;*** are small privately owned firms. However lenders generally tend to var industry in terms of the publicly available data for the large firms and we have any evidence that financing is more easily obtained by smaller firms in the experience of Becker Communications Associates is that such smalki ote have greater difficulty obtaining financing.

In our opinion, the copyright royalty rate provided for by section 111 the Bill, even though it has been said to be a nominal rate by some, w ally impede the ability of both the larger publicly owned and the smaller int owned companies to obtain additional invested capital.

Let me illustrate the impact of copyright royalty payments by a specidere ka which is applicable to both large and small operators. At the prešit fi average revenue per subscriber is in the range of $5 to $6. Assuing #NUM high level of $670 per month, our studies of representative firms in the show that the level of operating and general and administrative costs have les approximately 62 percent, interest approximately 14 percent, and der r00 3 spproximately 19 percent, leaving a pre-tax profit of about 5 percet* or 33 in our exau.ple of a monthly subscription rate of $6.50. The imposition of ai percent rovalty rate introduces an additioral cost of 16 cents per month ret pre tax profits to 23 percent, a decline of 50 percent in pre tax profts. T° kisai ur acceptably low return on revenues, either for debt or equity finatorg : STK HER It rght be argued that a fee of this magnitude can be passed on the webscriber and prof' ibi dy improved. However, the experience of the i has been that local franchising authorities are reluctant to Increase rates of timely basis to keep pace with increasing costs and both the Coming fee of 1 not get Development and a leading eco totale ensu'tant to the indestry hose f in hevtions of market resistatice to increased subscriber rates over the cuffs

preta.ling levels (See Mitchell and Smiley, Cable Cities and Copyrights 5 The Bell Journal of Economics and Management science 235 (Spring, 1974), Committee on Economic Development, Broadcasting in Cable Television: Policies for Diversity and Change (1975).)

I have alluded to a second concern of those in the business of lending funds to this industry and otherwise arranging financing, and that is the potential for suecessive increases in the copyright royalty rate during the term of long-term financing. This could result from action by the Copyright Royalty Tribunal which would be created by section 802 of the Bill. The Bill sets no limit on the rate which might be imposed in a future year, thereby raising at a minimum the possiblity of significant changes in the assumptions upon which such financing was arranged Lenders can be expected to respond to this uncertainty by increasing their rates, lending smaller amounts for shorter periods of time or imposing other less favorable terms on CATV borrowers. Thus, uncertainty has its own separate cest to the industry.

In conclusion, Mr. Chairman, although we are not here to question the conexpt of liability for payment of a copyright royalty fee, the amount of that fee must be viewed in terms of the impact which it will have upon the industry's abdlity to obtain the additional financing which is essential to its growth and de ve, porent as a significant communications medium. Further, the uncertainty created by the open-ended power granted by section 102 to the Copyright Royalty Tribunal to adjust that fee in future years is itself a significant impediment to the industry in obtaining such financing.

I have not previously mentioned one further aspect of section 802 which is a cause for concern. It is not clear from this provision that the tribunal's power of adjustment would be limited to the amount of the fee itself Section 802 appears to provide that the tribunal can also change the revenue basis on which the roya 'y fee is assessed, perhaps even to include services which do not involve copyfight issues at all. We are not certain how broadly this power might be construed and that, of course, is the point. Uncertainty has its own costs

I appreciate the opportunity to appear before this Subcommittee to present our views on the impact of H R. 2223 on cable television financing. I will be happy to respond to your questions,

EXHIBIT II

BEFORE THE FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, D.C.

(Docket No. 20363)

In the Matter of: Amendment of part 76 of the Commission's Rules and Regula tions relative to postponing or cancelling the March 31, 1977 date by which major market cable television systems esisting prior to March 31, 1972, must de in compliance with section 76251 (a) (1)-(a) (8)

COMMENTS OF WARBURG PARIKAS BECKER, INC.

In connection with the above referenced. Notice of Proposed Rulemaking solieIting comments on the March 31, 1977 deadline for compliance with the provi ↑ Section 78 251 (a) (1)–(a) (%) of the Commission Rules, The Becker and Warburg Paribas Group, Inc., by its Attorneys, hereby records with the Comal,ssion, its following findings of available Capital Financing for the CATV Industry, particularly concerning funds available for so called system “rebund”. The Be ker and Warburg Paribas Group, Ine ("BWPG") and its predecessor, A. G. Becker & Co. Incorporated, has over 50 years of experience in the field of investment banking. Its activities include the granting and distribution of debt ises, the evaluation of delt and security issues for pu' lie and private clients, 1e Lrm is a member of the New York, American, Mid West and Pacifie Stock Ex Langes, as well as the Chicago Board of Options Exchange and numerous regional stock exchanges, BWPG engages in international investment banking forough its European partners, 8. G. Warburg & Co. London and Cie Financiere de Paris and des Pays Bas in Paris. Further. Becker Communicationis Associates (PCA") is an active lender to the CATV industry with approximately $30 r... n in loans and commitments outstanding and BCA and Warburg Paribas Becker (WPB) on wholly owned subsidiary of BWPG which handles the extporate Evance activities of BWPG) have five officers who specialize in CATV In connection with their corporate finance activities În CAIV, the Becker groups are in continuing contact with the lenders to the Industry and regularly con pale mtatistics on the lending activities to the Industry In order to provide the Colutions! " with stati ties on the available expital to the Industry, purtaenla-'y aw it might relate to the capital requirements imposed by 76 251, they have, ʼn the last several weeks ontacted the leading lenders to the industry and have deve! pød statistics on enpital availability in 1975 and 1976. The data sup I od torun therefor is extremely current

ve a basis for this study, WPB personnel contacted by phone or in person or el data from its files on 32 commercial banks, ten intermedi,fe term lend in and 34 Insurance companies. For many reasons including the fact that

* pat, en Would not make their figures priblie, Cheltug prohibited in cer. fatebratanews from doit g so by contractual obilgntions) available francing facile from the exquipment supplers to the Industry or from equipment leysing es are not included. The bulk of the ecritichs with the wam; fed lenders occurred in the m n'hs of January and February 1975– We believe it to be as -poeten study as has been dore to date and certain's the only study, which has leer done to our knowledge on this aspect of the CATV lend ng situation Aval wn 15 (5 art 1, the der der groups had 1979 omistan lt g to CATV comIves at December 31, 1974 of aperoximately 81 hit. T's grump titlelps term

g approximately a further 81×5 m !!!ion to the industry in 1975 with a range On!ễn to 874 million if the ecotomy and avadalle cnsh flow at 1 zent prefeldy for the better or worse,

g »!g* ** antis on these general protections w!! be the level of den un g by the Federal Government. As demo tinton text in 1974 during prints of g of avalable funds. (ATV eonist es find it pinnanti mati'y pre “。。 “ t to ge! e min ihmetty for financi'g}iter l'ee 1t,ཆོས སྨོས t.o s\, z!tu bn f བཎི།སྔ\ ཝཱ uf t!e {w !་གནས་xང་-ཟི,ཎཱི་ཐཱ ཟླ་- སོ འདིསྣ་.༢ !! fn lcais fr» *ve C° sw°» s! དྨ°! iu lབས་ཅོ་མོའ་€%% !% ![ Truf Putt es esteet to leed slig3 /'y m མ

མ་སྣ་ཛ་་པ》རྙིཆོར Treupའབར་ ཚུམས་༈ !fy€འི% %སུ་པ ཧཱུ'། ཡཱཔ་

the intermediate lenders since the bulk of these institutions have CATV §* :
units and have specific CATV loan budgets for 1975 and 1976. In the sune te
the least accurate prediction comes from the banks since few have CATV spa- »
ists and a number of banks make loans to the industry through more this o
lending unit or division. Finally, the widest range in the prediction coges fra
the insurance companies and this is a function of demand, credit and rate tr
erally, CATV will be competing in insurance companies with an investment ta
to upgrade their placement activities to A or Baa quality and most CATV &*
rowers could not qualify for such credit ratings.

Of particular importance to the review of the 1977 deadline, virtually no le* p* surveyed felt that they were in a position to help fund a significant porti » f the more than $400 million required capital projected by the NCTA bring systems into compliance. Adversely impacting on the ability or desite of these institutions to supply such funds is the fact that most CATV borroses are now judged by lenders to be fully leveraged based on their current symmet and cash flow levels. Accordingly, new credit extensions must be based ot pro jected increases in subscriber levels, additional revenue producing service and or other cash flow generating sources not for replacement of equipment. They" jections of available financing in Chart 1 are for new builds or exters ns existing systems, refinancing of existing systems to longer maturities a acquisition loans. The basic assumption of the lenders is that the preci their loan will be used to build plant in front of potential subscribers at a enough cost that the actual operating cash flow will be sufficient to amertage Phot loan over a fixed period at a given interest rate.

Specific examples of lender comments might be helpful. First, a number insurance companies who lend to one of the top 10 publie CATV Multicle Syste Operator companies (“MSO's") have informed the president of that Mso in their judgment the company is fully leveraged and that they will twa * to lend any funds for 1977 compliance without an increase in unleveraged a scribers, an increase in cash flow and or an increase in revenue prel. services. Second, a mid-west bank reported that they had found that they not lend as much as their borrowers requested when compliance was a f because many of the rules did not have an economie justification- that is 129 cient potential revenue to cover the costs. Finally, an intermediate lender ramad that they were concerned about their ability to continue serving ther CATV clients because these clients were being forced to borrow additional f.5" comply with 1977 when the lender actually needed to see these same dea reduce their outstanding balances in accordance with their note agreement.

An example of the impact in increased cost on the debt capacity of a statem might be the following. Assuming a system in a 100.000 home commu.....!y a' st industry standard of 100 homes per mile and an average cost of overbrad p'tit of $7,000 per mile, the plant cost would be $7,000,000.00, Assuming te fit holder borrowed this sum and achieved 30%, penetration of the 100 oun! pe would have debt per subscriber of $233. The ability to borrow on this system w be shown by the following. Assuming a 10 year loan at 100, interest and a Sen monthly subscriber rate with operating costs of 407, resulting in an oje tat monthly cash flow level of $3.50 would amortize $266 of debt per st (Source: Bond Tables based on $3.50 available cash flow 10 year *****y a 10% interest). Based on current standards, this would be a very d

to finance as most lenders would want to have a margin of safety grant thi? the $33 difference between $266 and $253. Consequently, most leters probably not loan more than $200 per subscriber

If for FCC rule compliance purposes the franchise holder is in the same equat and bad to increase his costs per mile from $7.000 to $5000 with all of or fat held constant, the debt per subscriber would become $267 Ass.]* Increased cost would not result in increased subscribers so the m would be held constant and support $266 of debt, the franchise holder wodzi able to borrow writheiert funds. For purposes of this analysis, w considered the infusion of equity cavit il from, the franchise Folder as tli «■. be offset in part by the need to borrow the initial operating losses

In summary, based upon WPB's survey of tra litoral der lers to De CATY industry it does not appear that these sources will be able to fund an 1.0*5 portion of the capital requirement generated by the 1977 rebuild roos reÉ CRÍA We therefore urge the Commission to suisperd the 1977 conipilince 1 fi such a suspension, caji'ai investment, if available at all, will tn 19, 1983