WORLD BONDS-Telecoms spending cuts may have silver lining
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By Dena Aubin
NEW YORK, April 16 (Reuters) - After binging on debt during
the New Economy heyday, many U.S. telecommunications companies
are putting their capital spending plans on a diet, and that
could bode well for bondholders, some strategists say.
A drop in capital spending could give companies a chance to
improve their balance sheets and credit quality, adding luster
to their out-of-favor bonds.
"The telecom sector arguably over-invested at peaks in the
economic cycle, which has undermined returns," Morgan Stanley
wrote in a recent report. "The good news is that we believe
many telecom operators are showing signs of exercising capital
discipline."
Bonds of investment-grade telecom companies already have
outperformed the corporate bond market, Morgan Stanley said.
While corporate bonds overall have weakened by about one basis
point relative to Treasuries over the last month, yield spreads
relative to Treasuries on comparable-maturity telecom bonds
have tightened about 11 basis points, Morgan Stanley said.
Investors can expect about 10 basis points more relative
outperformance over the next three to six months, said Morgan
Stanley telecom analyst Doug Colandrea.
Among the strongest performers in recent weeks were Qwest
Communications International Inc. , Sprint Corp. ,
and AT&T Corp. unit AT&T Wireless, which remain among
Morgan Stanley's top picks in the sector.
"The sector for the first time in many, many years is
exercising capital discipline, and that's good for free cash
flow," Colandrea said.
DEFICITS REACH $206 BILLION
Capital spending by the largest U.S. players, which grew at
the breathtaking rates of 32 percent in 1999 and 25 percent in
2000, should see a growth rate of just 2 to 3 percent this year
and decline by that amount in 2002, Morgan Stanley said.
Spending was due for a pullback.
Since 1996, the year Congress deregulated the phone
markets, telecom companies have run through $206 billion in
deficit spending, financed with public debt and equity, a
recent report by Lehman Brothers said. But as companies
competed to deliver Internet access, wireless and traditional
phone services, prices fell and returns on investment fell
short, sending shares into a tailspin.
Strategists now are reasoning that as investors pull back,
funding will be rationed to the strongest players, who stand to
benefit from a shakeout of telecom upstarts.
Lehman Brothers equity analyst Blake Bath, among those
warning about the industry's over-investment last fall, sees a
healthier sector going forward.
Bath is predicting "sharply improved profitability in 2001"
for established local phone companies, known as regional Bells,
as their cash flow improves and competitors retrench.
One reason Bath is bullish: a Bush administration may be
friendlier to mergers between regional Bell operating companies
and long-distance carriers, which would result in major cost
savings and reduce their capital spending requirements.
INVESTORS REMAIN SKEPTICAL
That doesn't mean the sector as a whole is getting an
all-clear signal.
Telecom upstarts, financed mostly in the junk bond market,
are still cratering under mountains of debt, slowing revenue,
fierce competition and tight capital markets.
Even with much lower capital spending, emerging U.S.
telecom companies won't likely turn profitable by 2002, said
Bath. Losses by that group will likely total nearly $10 billion
next year, Bath estimates.
Another problem is that the investment pullback cuts both
ways. To trim capital spending, some companies will have to
slow the roll-out of promising new wireless and Internet-access
services, delaying revenues from these high-potential areas.
"You haven't seen a tremendous amount of excitement from
the buyside, just because there's still a tremendous amount of
concern about what a slowdown in the economy is going to mean
for some of these companies,"said Robert Schiffman, telecom
analyst for Credit Suisse First Boston.
Even if the largest waves of debt issuance are over,
companies still have sizable funding needs, he added.
"The supply risks we have aren't the same as six months
ago, when multiple companies had jumbo deals to do, but there
are still plenty of companies lined up to borrow money," he
said.
Deutsche Banc Alex. Brown also is cautious about the
sector.
"While we fundamentally like the industry, we're not sure
all the investment will pan out, how much demand will
materialize, and what products and services you and I will pay
for," said Deutsche Banc telecom analyst Gary Jacobi. Deutsche
Banc has been encouraging investors to slightly underweight
large-cap telecom carriers.
Those bullish about telecom say these risks are already
priced into bonds, at least in the investment-grade arena. The
biggest pressures on telecom bonds last year -- waves of debt
that weighed on credit ratings and balance sheets -- are also
reflected in prices, some say.
Citing generous yields and a light calendar of debt
issuance, Merrill Lynch & Co. recently urged investors to
overweight high-grade telecom bonds, calling the sector a
short-term trading opportunity.
"Sometimes the best time to buy something is when it is
universally out of favor," Merrill Lynch wrote in a recent
report.
859-1673,
dena.aubin@reuters.com))
REUTERS
Rtr 11:15 04-16-01 |
