Investors' losses mount on telecom upstart bets
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By Dena Aubin
NEW YORK, March 28 (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. 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. said it was
acquiring the assets of NorthPoint Communications 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. , which
acquired the assets of bankrupt GST Communications Inc. last
August, McLeodUSA Inc. , XO Communications Inc.
, and Allegiance Telecom Inc. .
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."
859-1673,
dena.aubin@reuters.com))
REUTERS
Rtr 15:01 03-28-01 |
