Moody's cuts Williams Communications Group
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(Press release provided by Moody's Investors Service)
Approximately $6 billion of Debt Securities Affected.
NEW YORK, July 19 - Moody's Investors Service has lowered
the senior unsecured rating of Williams Communication Group,
Inc. (WCG) to Caa1 from B2.
The outlook remains negative.
Other ratings affected include: Ratings downgraded Williams
Communications Group Inc.'s Issuer rating to Caa1 from B2
Senior Implied rating to B3 from B1 Senior Secured Bank
facility to B2 from Ba3 Senior Subordinated Shelf to (P) Caa2
from (P)B3 Senior Unsecured Shelf (P)Caa1 from (P)B2.
Ratings confirmed Williams Communications Group Inc.'s
Preferred Shelf rated (P)"caa" Preferred Stock rated "caa".
Williams Communications Group Note Trust's Senior Secured
notes rated Baa3 .
The rating downgrade reflects our concern regarding WCG's
recent operating results, which fall short of Moody's
expectations as well as our belief that these results may be
yet further impacted by the general economic slowdown, and in
particular, by the broad-based scaling back of spending plans
within the telecom sector.
In March 2001 Moody's changed the outlook on WCG to
negative from stable following the recapitalization associated
with its spin-off from the Williams Companies.
At that time we expressed our concern regarding WCG's
heightened financial leverage as well its aggressive growth
model for 2001which we indicated we would carefully track.
We noted that a failure to meet Moody's expectations on
certain fundamentals of this business plan, including revenue
and EBITDA growth, capital expenditures and debt levels would
likely result in a downgrade action.
The outlook remains negative, and ratings could be lowered
if WCG's financial performance and liquidity position face
increasing pressure.
The rating is supported by WCG's first- to- market network
deployment, its experienced management team and the strength of
its customer base, including SBCwhich accounts for
approximately 25% of WCG's revenues.
On May 1, 2001, WCG lowered its revenue forecast for 2001
to $1.2-$1.3 billion from its earlier $1.3-$1.4 billion
forecast, citing an approximately $90 million negative impact
on recurring revenues resulting from the bankruptcy of Winstar
Communications.
The company also announced a scaling back of its 2001-2002
capital expenditures to $3.2 billion from $3.9 billion, which
it ascribed to greater efficiency in the deployment of capital.
Although the company represents that its operational
performance continues to demonstrate strong execution to plan,
Moody's considers that its recent results, revised guidance and
decision to reduce the size of its work-force provide a signal
that the company is affected by the sector-wide difficulties
experienced by virtually all wireline telecom service
providers, including broadband fiber network operators.
WCG and other broadband service providers formulated their
original business models during the late 1990's when it
appeared that data traffic was entering an exponential growth
phase, fueled in part by the anticipated bandwidth needs of
ISP's, Internet content and hosting service providers, and
e-commerce start-ups.
The broadband service providers expected to accommodate
most of this demand indirectly through capacity sales to
carriers and data centric enterprise customers, although a
substantial volume of direct sales were also booked to data
service start-ups.
Following the dot.com meltdown, broadband service providers
have generally suffered from substantially scaled back customer
spending plans, as well as a degree of direct receivables
exposure to "at risk" start-ups. As a result, when these
"at-risk" companies fail, receivables need to be written down
and these companies are either unable or severely limited in
their ability to buy capacity from carriers like WCG in the
future.
While WCG has many solid accounts, such as SBC, it also has
asignificant exposure to CLECs and ISPs.
Compounding the slow-down of dot.com related business, the
current economic slowdown has also caused a number of
enterprise customers to cut back on their data spending plans.
On the supply side, a substantial number of national and
regional broadband fiber operators have recently emerged with
business plans similar to WCG's, competing for the business of
the same top few hundred carrier and enterprise accounts.
This highly competitive environment has placed pressure on
lightwave pricing in the face of lower than anticipated demand
elasticity.
As of March 30, 2001, pro-forma for the its upsized bank
facility, WCG recorded liquidity of approximately $2.1 billion,
including $975 million available under its credit facility.
This level of liquidity is available to support remaining
2001/2002 capital expenditures projected by the company at
approximately $2.7 billion plus remaining 2001/2002 debt
service expense that we estimate at approximately $1.0 billion.
We consider that the company will likely depend upon the
monetization of certain assets to help plug any potential
operational funding gap, including the proceeds from the sale
of its Solutions business and ATL as well as the proposed sale/
lease-back on its corporate headquarters.
Moreover the company has indicated that expects to raise an
additional $250 million in equity funding from a strategic
partner and plans to close on a commitment for a further $300
million in bank financing.
There is no assurance that the company can conclude these
funding transactions on acceptable terms and conditions. With
its network build-out substantially complete, WCG's future
capex is largely success based.
Moody's believes that WCG would probably scale back on
future capital investments if it faces any protracted softness
in its revenue ramp.
While the implementation of a flexible capital spending
plan would permit the conservation of cash, we consider that
the underlying downsized business model would likely further
delay the attainment of positive free cash flow.
Williams Communications Group is headquartered in Tulsa,
Oklahoma.
REUTERS
Rtr 12:50 07-19-01 |
