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

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

Becker Communications, and its affiliates, are in continuing contact with lenders to the CATV industry and regularly compile statistics on the availability of debt and equity financing. Within the last several months, in connection with a report which was submitted to the Federal Communications Commission, we have contacted the leading lenders to the industry and have developed statistics on capital availability in 1975 and 1976 from 32 commercial banks, 10 intermediate term lenders and 34 insurance companies.

The lenders included in this survey have provided a substantial portion of the total available debt financing for CATV construction and operation. Accordingly, their projections as to future financing plans provide the best and most authoritative indication of expansion prospects for the cable television industry. A copy of this report is attached as Exhibit II. Our survey showed the availability of approximately $185 to $200 Million in each of the next two years, dependent upon what assumptions are made as to improved profitability of specific firms within the industry

While it is difficult to accurately project the true capital requirements of the CATV industry over this time frame, we believe this level of financing is inadequate to provide for any substantial expansion of service or construction of new plant facility. As a reference point, under Proposed Regulations of the Federal Communications Commission, a large number of cable companies serving the top 100 markets would be required to make substantial expenditures on existing plant in order to bring their systems in compliance with the Commission's 1972 Rules on channel capacity and two-way communication capability. The National Cable Television Association has estimated the cost of this upgrade program to be approximately $423 Million, if completed by the Commission's deadline of March 31, 1977.

If the cable television business is to raise even a fraction of the capital estimated to be necessary before it comes into compliance with the Commission's rules and builds substantial additional capacity, it must become a profitable industry. Exhibit I shows, however, that the nine leading CATV companies lost a total of approximately $16.3 million in 1974. Obviously, these results must improve before substantial new capital will become available.

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

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

Let me illustrate the impact of copyright royalty payments by a specific example which is applicable to both large and small operators. At the present time, the average revenue per subscriber is in the range of $5 to $6. Assuming a relatively high level of $6.50 per month, our studies of representative firms in the industry show that the level of operating and general and administrative costs have been approximately 62 percent, interest approximately 14 percent, and depreciation approximately 19 percent, leaving a pre-tax profit of about 5 percent, or 33 cents in our example of a monthly subscription rate of $6.50. The imposition of a 2%1⁄2 percent royalty rate introduces an additional cost of 16 cents per month, reducing pre-tax profits to 2.3 percent, a decline of 50 percent in pre-tax profits. This is an unacceptably low return on revenues either for debt or equity financing purposes. It might be argued that a fee of this magnitude can be passed on to the cable subscriber and profitability improved. However, the experience of the industry has been that local franchising authorities are reluctant to increase rates on a timely basis to keep pace with increasing costs and both the Committee on Economic Development and a leading economic consultant to the industry have found indications of market resistance to increased subscriber rates over the currently

prevailing 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 successive 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 possibility 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 cost to the industry.

In conclusion, Mr. Chairman, although we are not here to question the concept 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 ability to obtain the additional financing which is essential to its growth and development as a significant communications medium. Further, the uncertainty created by the open-ended power granted by section 802 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 royalty fee is assessed, perhaps even to include services which do not involve copyright 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 Regulations relative to postponing or cancelling the March 31, 1977 date by which major market cable television systems existing prior to March 31, 1972, must be in compliance with section 76.251 (a) (1)-(a) (8)

COMMENTS OF WARBURG PARIBAS BECKER, INC.

In connection with the above-referenced Notice of Proposed Rulemaking soliciting comments on the March 31, 1977 deadline for compliance with the provisions of Section 76.251(a)(1)–(a)(8) of the Commission Rules, The Becker and Warburg-Paribas Group, Inc., by its Attorneys, hereby records with the Commission, its following findings of available Capital Financing for the CATV Industry, particularly concerning funds available for so called system "rebuild". The Becker and Warburg-Paribas Group, Inc. (“BWPG") and its predecessor, A. G. Becker & Co. Incorporated, has over 80 years of experience in the field of investment banking. Its activities include the granting and distribution of debt issues, the evaluation of debt and security issues for public and private clients. The firm is a member of the New York, American, Mid-West and Pacific Stock Exchanges, as well as the Chicago Board of Options Exchange and numerous regional stock exchanges. BWPG engages in international investment banking through its European partners, S. G. Warburg & Co. London and Cie Financiere de Paris and des Pays Bas in Paris. Further, Becker Communications Associates ("BCA") is an active lender to the CATV industry with approximately $20 million in loans and commitments outstanding and BCA and Warburg Paribas Becker ("WPB") (a wholly-owned subsidiary of BWPG which handles the corporate finance activities of BWPG) have five officers who specialize in CATV. In connection with their corporate finance activities in CATV, the Becker groups are in continuing contact with the lenders to the Industry and regularly compile statistics on the lending activities to the Industry In order to provide the Commission with statistics on the available capital to the Industry, particularly as it might relate to the capital requirements imposed by 76,251, they have, within the last several weeks contacted the leading lenders to the industry and have developed statistics on capital availability in 1975 and 1976. The data supplied herein, therefor, is extremely current.

As a basis for this study, WPB personnel contacted by phone or in person or compiled data from its files on 32 commercial banks, ten intermediate term lenders and 34 insurance companies. For many reasons, including the fact that many companies would not make their figures public, (being prohibited in certain instances from doing so by contractual obligations) available financing facilities from the equipment suppliers to the Industry or from equipment leasing companies are not included. The bulk of the contacts with the sampled lenders occurred in the months of January and February 1975. We believe it to be as complete a study as has been done to date and certainly the only study which has been done to our knowledge on this aspect of the CATV lending situation.

As shown in Chart 1, the lender groups had loans outstanding to CATV companies at December 31, 1974 of approximately $1 billion. This group anticipates lending approximately a further $185 million to the industry in 1975 with a range of $360 million to $74 million if the economy and available cash flow should change appreciably for the better or worse.

Impacting significantly on these general projections will be the level of deficit financing by the Federal Government. As demonstrated in 1974, during periods of tightening of available funds, CATV companies find it proportionately more difficult to get commitments for financing. Further, the emphasis of many commercial banks is to shorten the maturity of their loans which has the effect of making construction loans to new CATV systems difficult to justify economically. The institutions expect to lend slightly more funds in 1976 based, in part, on an expected improvement in the overall economy and a continued emphasis on improving reported profits within the major CATV companies.

The projections for 1975 and 1976 are generally speculation or guesstimates on the part of most institutions since they generally react to loan proposals rather than actively seeking loans. However, the most accurate predictions come from

the intermediate lenders since the bulk of these institutions have CATV specialist units and have specific CATV loan budgets for 1975 and 1976. In the same vein, the least accurate prediction comes from the banks since few have CATV specialists and a number of banks make loans to the industry through more than one lending unit or division. Finally, the widest range in the prediction comes from the insurance companies and this is a function of demand, credit and rate. Generally, CATV will be competing in insurance companies with an investment policy to upgrade their placement activities to A or Baa quality and most CATV borrowers could not qualify for such credit ratings.

Of particular importance to the review of the 1977 deadline, virtually no lender surveyed felt that they were in a position to help fund a significant portion of the more than $400 million required capital projected by the ("NCTA”) to bring systems into compliance. Adversely impacting on the ability or desire of these institutions to supply such funds is the fact that most CATV borrowers are now judged by lenders to be fully leveraged based on their current subscriber and cash flow levels. Accordingly, new credit extensions must be based on projected increases in subscriber levels, additional revenue producing services and/ or other cash flow generating sources not for replacement of equipment The projections of available financing in Chart 1 are for new builds or extensions to existing systems, refinancing of existing systems to longer maturities and/or acquisition loans. The basic assumption of the lenders is that the proceeds of their loan will be used to build plant in front of potential subscribers at a low enough cost that the actual operating cash flow will be sufficient to amortize their loan over a fixed period at a given interest rate.

Specific examples of lender comments might be helpful. First, a number of insurance companies who lend to one of the top 10 public CATV Multiple Systems Operator companies ("MSO's") have informed the president of that MSO, that in their judgment the company is fully leveraged and that they will not be able to lend any funds for 1977 compliance without an increase in unleveraged subscribers, an increase in cash flow and/or an increase in revenue producing services. Second, a mid-west bank reported that they had found that they could not lend as much as their borrowers requested when compliance was a factor because many of the rules did not have an economic justification-that is insufficient potential revenue to cover the costs. Finally, an intermediate lender reported that they were concerned about their ability to continue serving their CATV clients because these clients were being forced to borrow additional funds to comply with 1977 when the lender actually needed to see these same clients reduce their outstanding balances in accordance with their note agreement.

An example of the impact in increased cost on the debt capacity of a system might be the following. Assuming a system in a 100,000 home community at an industry standard of 100 homes per mile and an average cost of overhead plant of $7,000 per mile, the plant cost would be $7,000,000.00. Assuming the franchise holder borrowed this sum and achieved 30% penetration of the 100,000 homes, he would have debt per subscriber of $233. The ability to borrow on this system will be shown by the following. Assuming a 10 year loan at 10% interest and a $6.00 monthly subscriber rate with operating costs of 40% resulting in an operating monthly cash flow level of $3.50 would amortize $266 of debt per subscriber. (Source: Bond Tables based on $3.50 available cash flow 10 year maturity and 10% interest). Based on current standards, this would be a very difficult loan to finance as most lenders would want to have a margin of safety greater than the $33 difference between $266 and $233. Consequently, most lenders would probably not loan more than $200 per subscriber.

If for FCC rule compliance purposes the franchise holder is in the same situation and had to increase his costs per mile from $7.000 to $8,000 with all other factors held constant, the debt per subscriber would become $267. Assuming that this increased cost would not result in increased subscribers so the monthly cash flow would be held constant and support $266 of debt, the franchise holder would not be able to borrow sufficient funds. For purposes of this analysis, we have not considered the infusion of equity capital from the franchise holder as this would be offset in part by the need to borrow the initial operating losses.

In summary, based upon WPB's survey of traditional lenders to the CATV industry, it does not appear that these sources will be able to fund any meaningful portion of the capital requirement generated by the 1977 rebuild requirements. We therefore urge the Commission to suspend the 1977 compliance date. Absent such a suspension, capital investment, if available at all, will be needlessly