Rainbow Raises $800M for Spinoff

After some speculation that a planned bond offering was attracting little interest, Cablevision Systems Corp. said its Rainbow National Services subsidiary has completed an $800 million debt deal that will be used to finance the planned spin-off of Rainbow Media Enterprises.

Rainbow National Services sold $300 million in 8.75% senior notes due 2012 and $500 million in 10.375% senior notes due 2014. In a separate deal, RNS said it also closed a $950 million senior credit facility, $600 million of which was drawn at closing. The net proceeds of both deals were distributed to RNS’s parent — Rainbow Media Enterprises — and will be used to pay down about $705 million in bank debt at Rainbow Media Holdings. The remaining proceeds — about $661 million — will be invested in RME subsidiaries, mainly its Rainbow DBS unit.

Cablevision expects to spin off RME — which will include its national programming networks — in September.

The offering was managed by Banc of America Securities, Bear Stearns, Credit Suisse First Boston and JP Morgan.

Cablevision first announced the offering on Aug. 2 and initial speculation in the high-yield bond community was that the deal was too pricey.

According to some published reports, the eight-year notes were expected to be priced at between 8.5% and 8.75% and the 10-year notes at 9.75% to 10%. While the final deal was priced a little higher, most observers didn’t see it as a disaster.

What had given some investors pause was that the private offering — available only to institutional investors — would be mainly used to finance Rainbow DBS, a unit that has been a financial drain on the company.

According to Cablevision’s second quarter financial reports, Rainbow DBS lost about $81 million in the period and had revenue of just $2.7 million.

Adding to the confusion: The offering did not include registration rights, which can make the bonds less liquid in the secondary markets. Some institutional investors are prohibited from investing in bonds that don’t have registration rights.

Standard & Poor’s rates RME at “single-B” with a negative outlook, mainly because of fears concerning the DBS venture, said S&P analyst Catherine Cosentino.

While National Services was formed mainly for the bond offering and includes Rainbow networks AMC, WE: Women’s Entertainment and the Independent Film Channel, she said the fear is that money generated by the networks could eventually be funneled to the DBS service, marketed under the Voom brand name.

“The feeling is that if there were a default by the parent because of problems with Voom, that could pull National Services into a potential bankruptcy,” Cosentino said. She added there is no indication that Rainbow is in danger of filing bankruptcy. Rainbow has said the DBS service is funded at least through 2005.