Investors' Losses Mount on Telecom Upstart Bets
By Dena Aubin
NEW YORK (Reuters) - The gloom surrounding dozens of telecom upstarts worsened this month as their stock and bond prices tumbled and analysts sounded fresh warnings about bankruptcies and defaults.
Competitive local exchange carriers, or CLECs, that are racing to snag business from the established Baby Bell local phone companies have been reeling since the tech bubble burst last year, drying up funding.
CLECs' mounting troubles have been one of the biggest drags on the junk bond market, which eagerly funded many of these companies during the height of telecom fever a year ago.
High-yield telecommunications bonds, which include many CLECs, posted a combined loss of 9.78 percent for this month and are down 2.73 for the year to date, according to Merrill Lynch & Co. CLECs' shares are down 30 percent for the year on a market-weighted basis, according to Morgan Stanley Dean Witter.
``Wall Street got ahead of itself,'' said Todd McMahon, a managing director at Boston-based investment bank RCW Mirus. ''Investors just wanted to see the upside and didn't see the downside risks.''
Casualty Count Grows
The risks are evident now.
In the last five months, five CLECs have filed for Chapter 11 bankruptcy protection and three have shuttered operations, according to a recent report from RCW Mirus.
All but a handful of large players are running out of cash, are effectively barred from the capital markets and face possible delisting, Mirus said.
Just last week, Herndon, Va.-based e.spire Communications Inc. (Nasdaq:ESPI - news) filed for bankruptcy protection. Many more CLECs are surviving month-to-month and are likely to default on their debt or be pushed into bankruptcy soon, said Moody's senior analyst John Page.
Liquidity is the main concern, said Page. ``The sector is largely out of favor with investors,'' he said, ``and the sector is also very capital-intensive.''
What's worse, assets of bankrupt CLECs are fetching only a fraction of the price investors once hoped for.
Last week, long-distance giant AT&T Corp. (NYSE:T - news) said it was acquiring the assets of NorthPoint Communications (Nasdaq:NPNTQ - news) for about $135 million. That amounted to only 0.26 times the value of property, plant and equipment, a new low for a CLEC's asset valuation, said Morgan Stanley Dean Witter equity analyst Todd Scott. Last year, he said, some CLECs sold for a multiple of about 1.0.
``It certainly raises the overall risk profile of the group if we're seeing the bottom (valuations) lower,'' said Scott.
Strong May Survive
Many high-yield investors once believed that even if CLECs' businesses failed, they would reap enough in asset sales to repay their debt. Analysts said that might have been true if only one or two CLECs had run into trouble.
``Unfortunately,'' RCW Mirus' McMahon said, ``when there's billions of dollars of equipment that is now potentially on the block, that salvage value is whatever the market will pay.''
Not surprisingly, many investors are steering clear.
``The recovery value of assets of the few CLECs that have slipped into bankruptcy have been disappointingly low,'' said Margaret Patel, a portfolio manager for Pioneer Investment Management Inc. in Boston.
Moreover, she said, management teams of many fledgling CLECs have a short history, and it's not clear how they'll fare in a stressed market.
Some high-yield investors still see value in the sector, but only among the stronger players.
``There's clearly a group of four or five tier-one survivors under any scenario,'' said Harry Resis, who manages $5.5 billion in high-yield investments for Zurich Scudder Investments in Chicago.
Companies he and many strategists view as the strongest players include Time Warner Telecom Inc. (NasdaqNM:TWTC - news), which acquired the assets of bankrupt GST Communications Inc. last August, McLeodUSA Inc. (NasdaqNM:MCLD - news), XO Communications Inc. (NasdaqNM:XOXO - news), and Allegiance Telecom Inc. (ALGX.0).
For weaker companies, their best hope may be an acquisition by a better-funded CLEC, Resis said, but no one appears to be in a hurry to make acquisitions.
``Capital is precious now,'' he said, ``and maybe the goal is to wait for a bankruptcy, when you can buy the assets on the cheap.'' |
