(AB)Bringing Ratings In Line With Funding Expectations-Part 1/2
2001-03-30 06:03 (New York)
Deutsche Banc Alex. Brown Inc. (B. Fifer) ARTT TGNT WCII
Fifer, Bo CFA 03/29/2001
Deutsche Banc Alex. Brown Inc.
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ADVANCED RADIO TELECOM CORP. (ARTT) "MKT. PERFORM"
TELIGENT INC. (TGNT) "BUY"
WINSTAR COMMUNICATIONS INC. (WCII) "STRONG BUY"
Bringing Ratings In Line With Funding Expectations -Part 1/2
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52-WK Earnings Per Share
FY Price Price 3-5 Yr Est.
Ticker End 03/29/2001 Range 2000 2001 2002 Growth Chg?
ARTT 12 0.28 42- (3.48) (2.22) NE N
TGNT 12 0.69 84-1 (12.53)A (9.66) (8.09) N
WCII 12 2.28 67-2 (9.66)A (11.01) (7.95) N
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HIGHLIGHTS:
-- The sustained collapse in the market for broadband stocks has made it
obviously very difficult for existing players to raise capital. We continue to
believe that the right on-net stories will ultimately prevail, but with
numerous failures likely to emerge first.
-- WinStar remains our preferred play in the space. We believe WCII has access
to approximately $550M of capital, which should take the company into 1H02. We
also believe with over 4,000 buildings on net and a significant customer base,
WCII will be successful in raising additional capital (most likely in the form
of a network services contract). We rate WCII a Strong Buy.
-- Teligent is likely hampered by its debt load as it looks to raise equity
capital. However, we also believe TGNT's cash balance of $362M (plus a minimal
amount of availability from the Rose Glen facility) is likely enough to take
TGNT into 4Q01, by which point the market may rebound enough for TGNT to
complete a financing. We are lowering our rating on TGNT to Buy to reflect our
preferred investment in WCII.
-- Advanced Radio Telecom is in the most precarious position of the three right
now, we believe. We currently estimate ART has 1-2 months of cash left and we
believe market conditions will make completing any deal very difficult in that
time frame. We are lowering our rating to Market Perform to reflect the
increasing unlikelihood that ARTT can pull off a last second "Hail Mary".
-- NET-NET: Our rating changes are the really the formal reflection of our
long-standing position that WinStar is the preferred investment in the
broadband space. However if ARTT were to find a source of additional capital,
we would immediately revisit our rating. At this point, however, we believe
the clock may be running out too quickly.
DETAILS:
The sustained collapse in the market for broadband stocks has made it obviously
very difficult for existing players to raise capital. In just the past four
weeks, our Broadband Index has fallen 28% versus a 12% decline in the NASDAQ.
Over that same period, more than one quarter of the names in our index (6 of
22) have fallen by 50% or more and nearly two-thirds (14 of 22) have fallen by
2% or more. This, of course, is a self-fulfilling prophecy that in and of
itself makes it more difficult for the group to raise capital, which in turn
leads to further share price declines.
We continue to believe that the right on-net stories will ultimately prevail,
but with numerous failures likely to emerge first. We are taking this
opportunity to reconsider our ratings on the three fixed wireless names we
cover.
WINSTAR: STILL THE PREFERRED INVESTMENT
WinStar remains our preferred play in the space. We believe WCII has access to
approximately $550M of capital, which should take the company into 1H02.
WinStar's detailed liquidity position follows:
(as of 4Q00):
Cash $315M
Lucent cash* $120M
Williams cash ** $50M
Subtotal $485M
DSO reduction $96M
Total $581M
* Lucent cash = overdrawing rights on available equipment facility.
** Williams cash = estimated payments from Williams for delivering hub capacity.
Source: company data, Deutsche Bank estimates.
Clearly, WinStar is not fully funded. But estimated EBITDA of over $40M in
2001 and cash capex of approximately $50M are essentially a wash. Therefore
WinStar has to cover its cash interest payments to become financially
self-sufficient. We estimate those cash payments as follows for 2001:
Cash Interest Payments
1Q01: $93M
2Q01: $93M
3Q01: $95M
4Q01: $104M
2001: $384M
Source: Deutsche Bank estimates.
In other words, we think WinStar has $101M of "excess" capital to get through
2001, without including any benefit of lowering DSOs according to management's
goals. Including a DSO reduction, WinStar may have up to $197M of "excess"
capital, which would allow the company to retire some preferred stock with cash
as opposed to common shares.
Of course, this is the rosiest scenario. The worst case in our view is to take
into consideration only current cash and incoming Williams payments (which we
consider safe). This would imply $365M of available capital which would last
the company into 4Q01. In reality we believe Lucent will remain an option for
funding for the time being and WinStar is likely realistically funded into
early 2002.
We also believe with over 4,000 buildings on net and a significant customer
base, WCII will be successful in raising additional capital (most likely in the
form of a network services contract). We continue to rate WCII a Strong Buy.
TELIGENT: HAMPERED BY DEBT
Teligent is likely hampered by its debt load as it looks to raise equity
capital. Any new equity will be subordinate to $1.5 billion of debt with just
about $1 billion of tangible assets underlying. Teligent is also somewhat
hampered in its ability to strike a network services deal by virtue of having
fewer on-net buildings than some of its competitors, although we would not put
this option out of the question.
However, we also believe TGNT's cash balance of $362M (plus a minimal amount of
availability from the Rose Glen facility) is likely enough to take TGNT into
4Q01, by which point the market may rebound enough for TGNT to complete a
financing.
Teligent has no further facilities available, other than its cash balance. We
expect Teligent to spend $270M on operations in 2001, plus an additional $80M
in capex (which of course is basically discretionary). That would imply $412M
available to service debt, much less than the $100M cash payments we believe
will be required in 2001. One of three things has to happen:
1) Makes all obligated payments in full, but only for the first 2-3 quarters of
2001.
2) Scales back capex to virtually nothing to fund debt service for the full
year.
3) Maintains minimal capex spending and defaults on payments to the debt
holders.
None of these scenarios is particularly appealing, to say the least. However,
we believe Teligent is still in the game with at least 2-3 quarters ahead of
them to arrange additional financing. We are lowering our rating on TGNT to
Buy to reflect our preferred investment in WCII.
ADVANCED RADIO TELECOM: HOW CAN THEY GET OUT OF THIS ONE?
ART is in the most precarious position of all broadband access companies right
now, we believe. We currently estimate ART has 1-2 months of cash left and we
believe market conditions will make completing any deal very difficult in that
time frame.
ART has yet to report 4Q00 results, so we have less insight into current cash,
but we do know this: ART ended 3Q00 with approximately $112M of cash. During
4Q, we estimate the company paid $60M to the FCC for licenses, invested $10M in
EBITDA, and spent perhaps $10M on capex. During 1Q01, we know the company made
a $10M interest payment on its bonds and estimate an additional $10M of EBITDA
losses with likely little, if any, capex. That would imply ART is down to its
last $10M.
That is, we suppose, enough to keep the lights on through June, perhaps, but
more likely ART is down to its final weeks. We are lowering our rating to
Market Perform to reflect the increasing unlikelihood that ARTT can pull off a
last second "Hail Mary". Given the relatively light debt load, we had guessed
ART would have had some luck in securing capital.
Indeed, the game is not quite over and we would certainly continue to support
the stock post some kind of financing arrangement that would yield at least
12-18 months of liquidity. However, given the market conditions and lack of
any credible talk of financing in the market, we believe this is becoming an
increasingly unlikely scenario.
NET-NET
Our rating changes are really the formal reflection of our long-standing
position that WinStar is the preferred investment in the broadband space.
However if ARTT were to find a source of additional capital, we would
immediately revisit our rating. Is this too little, too late in terms of
ratings changes? Maybe. We still believe the competitive advantages of fixed
wireless technology in terms of scalability and deployment costs will
ultimately prove to be a saving grace for those companies left standing after
the current market crisis ends. In our view, any of the fixed wireless
companies with capital are screaming buys at current levels. At this point,
however, we believe the clock may be running out too quickly on some of the
players. |
