Telecoms bonds can't fight that sinking feeling
By Jonathan Stempel
NEW YORK, May 22 (Reuters) - On Monday, Teligent Inc.
filed for bankruptcy protection from creditors. It
listed $1.65 billion of debt.
By some measures, that's a drop in the bucket.
In early May, Viatel Inc. filed for court protection,
listing $2.68 billion of debt. A month ago, it was Winstar
Communications Inc.'s turn; it listed $5 billion.
In January, NorthPoint Communications Inc. sought the
bankruptcy court's help. Experts said it's only a matter of
time before PSINet Inc. follows suit.
Welcome to the ever-expanding world of bond defaults by
upstart telecommunications companies. And like the bottomless
cup of coffee, analysts see no end to them.
"We were all counting on substantial growth in the telecom
sector," said Katie Heagy, an investment analyst specializing
in media and telecom at Federated Investors in Pittsburgh.
"The question investors are now asking themselves is
whether that growth will in fact ever be there," she said.
Including Teligent, which had $740 million of unsecured
bonds, U.S. telecoms -- which comprise 20 to 33 percent of the
U.S. junk bond market, depending on who's counting -- have
defaulted on $13.3 billion of debt this year, according to
credit rating agency Fitch.
Moody's Investors Service, another credit rating agency,
puts the total, excluding Teligent, at $10.5 billion, out of
$29 billion of defaults from all U.S. companies. In all of
2000, it said, there were just $6.5 billion of U.S. telecom
defaults.
Fitch, for one, expects the total to reach $15 billion to
$20 billion for the year. That is, if one counts only those
companies most at risk.
The saga of how investors, telecoms and their money parted
ways, like the life spans of many of the telecoms, is short.
And it isn't pretty.
"The honeymoon is over," said John Page, a Moody's senior
analyst.
DEREGULATION FAILS
Five yearsago the U.S. Congress deregulated local phone
markets. This led dozens of companies to build state-of-the-art
networks, expecting a surge in demand and a gush of profits.
"At that time the public debt and equity markets were ready
for investment in an emerging telecom sector," said Page.
"We had just had a wave of IPOs (initial public offerings)
of dot-coms and ISPs (Internet service providers), and these
required bandwidth," he continued. "It seemed a very logical
place for investors to put their money, and the environment was
that companies could effectively get capital on demand."
But that was before Baby Bells such as SBC Communications
Inc. , and Bell Atlantic and NYNEX, now part of Verizon
Communications Inc. , started making inroads.
Profits suddenly seemed more like a pipe dream. Lenders and
investors got impatient, and the capital markets seized up.
"With tight capital market conditions, combined with a
weakening economy, it's hard to have a lot of clarity" about
telecoms' prospects, said Heagy.
Indeed, many of these companies are not now giving
investors cause to wait around. After a default, creditors,
especially unsecured ones, often don't get their money back.
"In the first quarter, the average price of defaulted
telecom issues, one month after default, was 11 cents on the
dollar," said Mariarosa Verde, a Fitch senior director. "That
means the losses on these defaults are severe."
"CUSP" NAMES
What shocked many is how fast the malaise spread.
"We've been surprised by the speed at which everything gets
in trouble," said Wayne Morgan, senior vice president at
Wachovia Asset Management in Winston Salem, N.C. "At the first
sign of liquidity problems, spreads (bonds' yield margins over
that of U.S. Treasuries) just gap out."
That has hurt junk bonds as a whole.
Though the bonds have returned nearly 6 percent so far this
year, essentially retracing last year's telecom-driven losses,
it is the better quality bonds leading the way up, according to
Merrill Lynch & Co. Junk bonds on average still yield about
12.5 percent, Merrill Lynch said.
What remains to be seen is whether better-regarded telecoms
will follow their weaker brethren into the morass.
A common target of investor concern: XO Communications Inc.
, a Reston, Virginia-based voice and data services
company.
Its 10.75 percent notes maturing in 2009 were recently bid
at just 47.5 cents on the dollar. That level suggests investors
don't know what to think. This, even though XO said in April it
has enough cash to keep running into 2003.
"People are worried about companies on the cusp of being
survivors," said Heagy. "XO is right on the cusp -- great
assets, great management team, but will it find enough
customers to meet its $375 million revenue target by the fourth
quarter?"
It needs that to avoid defaulting on its bank credit lines,
she said. XO's first quarter revenues totaled $277 million.
In the end, analysts said, junk telecom bonds will remain
too risky for many investors, even ones with strong stomachs.
"I don't see how investors can protect themselves if they
own the bonds now," said Verde.
223-6317,
jon.stempel@reuters.com ))
REUTERS
Rtr 14:13 05-22-01 |
