TV Filme Inc. Rtgs Lowered to 'B-' by S&P;Outlk Stable.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/16/98--Standard & Poor's today lowered its corporate credit and senior unsecured debt ratings for TV Filme Inc. to single-'B'-minus from single-'B'.

The outlook is now stable.

The downgrade reflects operating performance below Standard & Poor's original expectations. TV Filme has expanded its subscriber base more slowly than anticipated, and has encountered difficulty in bringing down churn and reversing the deterioration of earnings before interest, taxes, depreciation, and amortization (EBITDA) margins. Theses conditions are likely to continue given the economic climate in Brazil and expectations that performance in existing markets through 1999 will not improve due to the recessionary environment.

TV Filme's performance was impacted by unemployment and the economic slowdown resulting from the sharp increase in interest rates by the Brazilian Government in the last quarter of 1997, causing a lag in subscriber addition and an increase in churn. Subscriber base growth has remained flat in the last 12 months, while bad debt expense has increased on a quarterly basis. Consequently, EBITDA on a trailing 12 months basis based on second-quarter results has been only about break even in 1998. While the disconnection of delinquent subscribers has improved the subscriber base quality, the recessionary environment in 1999 may impose barriers to subscriber addition.

TV Filme has recently won four new licenses of the small and medium cities packages in an auction held by the National Telecommunications Agency (Anatel) for the Brazilian cities of Bauru, Franca, Campina Grande, and Caruaru. TV Filme has no current competition in Campina Grande and Caruaru. The new markets will add 320,000 new households to the existent 1.3 million. The license costs (approximately US$1.8 million for the four) and the required capital expenditures for these markets are not significant. Standard & Poor's expects that while the capital expenditures associated with these markets in the next year will not deplete the large cash balances held by the company, positive EBITDA generation from these markets will only occur over a 12-18 month horizon. This is due to the relatively low per capita income of the cities with no competition, the existence of competition in the more economically attractive markets, and current market conditions.

The results of the license auctions for the larger cities are expected to be awarded soon. The capital expenditures associated with these licenses will be significant; the minimum prices range from US$1 million-$3 million for each market, and high premiums are expected in some markets. However, TV Filme may enter these markets through partnerships or joint ventures, without incurring any additional debt.

The rating is supported by strong cash balances, which have been used carefully by the company thus far, and few capital expenditures projected for 1999, given limited prospects for subscriber base growth in the near term.

TV Filme is a provider of MMDS services in the cities of Brasilia, Goiania, and Belem, Brazil. TV Filme is a publicly traded U.S. company, with headquarters in the city of Brasilia.

OUTLOOK: STABLE

The stable outlook is predicated on the company's ability to maintain cash balances to serve interest payments in the next 18-24 months, when operating cash flow is expected to cover interest expenses. -- CreditWire