IN THE MONEY: The Telecom Play - 'Murder On Wall St.'
By CAROL S. REMOND
A Dow Jones Newswires Column
(This column was originally published Tuesday.)
NEW YORK -- If they could film this one it would be a horror movie.
Many of the more highly leveraged telecommunications companies saw their share prices ravaged Tuesday as investors became concerned about the ability of these companies to pay back their debt.
What's interesting, though, is that it's not just the little guy whose investments are getting killed. Some of the smartest money on Wall Street has become caught up in the downdraft and, well, isn't looking too smart anymore.
From Forstmann Little & Co.'s $2.25 billion preferred investments in Xo Communications Inc. (XOXO) and McLeodUSA (MCLD) to Credit Suisse First Boston and Microsoft Corp.'s (MSFT) preferred investments in Winstar Telecommunications (WCII) to Craig McCaw's 50% stake in Xo and Paul Allen's $300 million investment in Metricom (MCOM), a lot of trend setters appear to have been caught by surprise.
The involvement of these investors in these companies is what attracted others. But as the massive repricing that is gripping U.S. stocks has most investors heading for the exits, it's quite possible that even these professionals may lose most of the money they invested in once high-flying telecom upstarts.
Take Forstmann Little's two investments in Xo's preferred shares last year. The well-known New York buyout firm made an initial investment of $850 million in January and added another $400 million in July. These preferred shares are entitled to 3.75% dividends and are convertible into shares of Xo's class A common stock at $31.625 a share.
For the moment, Xo looks on semi-secure grounds because of the $1.86 billion in cash and marketable securities on its balance sheet at the end of 2000. But what happens if Xo has to restructure some of its massive debt? Well current market prices seem to indicate that little if anything will be left for the company's unsecured creditors, let alone equity holders.
Xo's bank debt is currently trading at about 85 cents on the dollar, indicating that holders of the Reston, Va. telecommunication company's $1 billion in secured bank debt expect to lose about 15 cents for each dollar they loaned. Meanwhile, holders of Xo's $4 billion in publicly traded bonds are also expecting to come down on the losing side. The mid-price of Xo's 10.75% senior notes in fact indicates a 58 cents loss.
So, how do these prices sit with Forstmann's preferred investments? Nowhere really.
Xo's $2.8 billion in property and equipment would likely barely cover secured claims, trade bills and bondholders if Xo were to restructure in or out of bankruptcy. And since preferred share holders come after bondholders, nothing is likely to be left. Xo's stock lost almost 44% of its value Tuesday, trading down to $2.96. Fortsmann also holds $1 billion in McLeodUSA's preferred stock. That company's stock has lost 55% of its value since the beginning of the year, closing at $6.50 a share on Tuesday.
And what about McCaw's controlling stake in Xo? Here again, because his preferred and common share holdings are subordinate to creditors and vendors, the communications pioneer from Washington State would likely lose almost all of his investment in the company if a restructuring occured.
Lucent Technologies, Microsoft, Credit Suisse First Boston and Welsh, Carson, Anderson & Stowe also look like likely losers if, as many expect, a second wave of restructuring is set to engulf the telecom sector.
For one, a large chunk of Lucent's $600 million plus credit exposure to Winstar Communications (WCII) may be in jeopardy. Although vendor finance is senior to equity and bond claims in bankruptcy court, current debt prices indicate that little if anything will be left to make Lucent whole. Winstar's secured bank debt is seen trading around 50 cents on the dollar, while its bonds are changing hands at around 13-cents-on-the-dollar, levels clearly indicating creditors' concerns. (The value of Lucent's credit is somewhere between those two numbers).
As for Microsoft, Credit Suisse and Welsh, Carson's investments in Winstar's $1.2 billion in preferred convertible stock offerings last year, they also are clearly worthless in the event of a restructuring.
Microsoft's co-founder Paul Allen and telecommunication giant worldCom (WCOM) are also likely to feel some pain. The value of their respective $300 million investments in mobile wireless service provider Metricom (MCOM) was certainly put in question last week when accounting firm Arthur Andersen said it has "substantial doubts" about Metricom's ability to continue as a going concern.
And what about Motorola's (MOT) 76% equity stake in Next Level Communications Inc. (NXTV)? Next Level's stock closed at $3.75 a share Tuesday, down nearly 27%. Next Level's shares have lost 72% of their value over the last month alone.
And if you think you're immune to all of this madness, think again.
Despite last year's tech debacle, a number of big time mutual funds are still massively exposed to shaky telecom companies.
Regulatory filings show that Putnam Investment Management alone holds 51.8 million shares of McLeodUSA's 600.9 million outstanding shares, with about 21.3 million held by the Putnam New Opportunities Fund. Putnam also holds 42.9 million shares of Xo's 365 million shares.
Janus Capital Corp. also appears as a big risk taker. The investment firm holds 42.7 million of McLeodUSA with 10 million in its Janus Enterprise Fund and 8.24 million in the Janus Growth and Income Fund. Janus also holds 11.4 million shares of Winstar's 93.2 million shares outstanding in six of its funds, 2.23 million of which are held in the Janus Mercury Fund.
Alex Brown Investment Management meanwhile took a definite gamble when it doubled its holding of Winstar's stock late last year and clearly seems to have lost. The investment fund now holds 5.56 million shares of Winstar.
-By Carol S. Remond, Dow Jones Newswires; 201-928-2074; carol.remond@dowjones.com |
