DJ Distressed Telecom Bonds Tough For `Vultures' To Value
21 May 11:36
By Michael C. Barr
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Not everyone is unhappy about the weakening economy.
For the so-called "vulture investor," these are profitable times.
Vulture investors specialize in making money off the debt of credit-impaired,
defaulting and bankrupt companies. They buy the debt in the form of bonds, bank
debt and vendor claims at bargain, or "distressed" prices. They believe, based
on their analysis of a company, that when the underlying value is properly
realized, they will be richly rewarded.
For debt to be distressed it must trade at a price of less than 80, according
to Robert Grossman, group managing director at the ratings agency Fitch. While
some of the debt is current on interest payments, much of it is in default.
Default volume for the first four months of this year totaled $33.3 billion,
surpassing the total of $27.9 billion for all of 2000, according to Fitch.
Further, the telecom sector alone has seen 24 companies default on a total of
$18 billion in bonds since early 2000.
Telecoms are a potential treasure trove, but the vulture investors are
struggling to find value in the sector.
The more a company is asset-intensive or has a franchise value, the more
likely it is to do well in bankruptcy, says Grossman. However, service
companies, or retailers, which are fashion-oriented, often do not do as well.
The asset-intensive companies can be restructured, but the other companies'
assets are too flimsy to serve as the basis of an ongoing enterprise.
The trick for the distressed investment community is to determine which
category individual telecoms fall into.
Diamonds Are a Vulture's Best Friend
There is some value in telecoms "but they are difficult to analyze," says
Marty Whitman, principal of Third Avenue Funds, in New York City, which
specializes in distressed debt. His firm has tried to investinstead in
companies that are suppliers to telecoms and which can be more easily analyzed.
Whitman has looked at and recommends Myrtle Beach, SC-based AVX Corp. (AVX) and
Simpsonville, SC-based KMET Corp.(KEM), both of which have strong balance
sheets and make electronic components.
"There are diamonds in the rough" in telecoms, agrees Harold Rivkin principal
of H. Rivkin & Co., a Princeton, N.J., brokerage firm that specializes in
distressed debt. However, he echoes complaints that distressed investors cannot
get a handle on them. He believes the traditional vulture investor is finding
it difficult to do analysis. Then a herd mentality takes over, with no one
willing to take a risk.
As an example of a bond that is extremely cheap, but cannot be easily valued,
Whitman points to Winstar Communications, Inc. (WCIEQ).
"Winstar may be a big bonanza," he said. However, he says he cannot figure
out the value of the assets.
Winstar is a competitive local exchange carrier, or CLEC, that filed for
bankruptcy protection on April 18. The bankruptcy was triggered by the refusal
of Lucent Technologies Inc. (LU) to continue its vendor financing of Winstar.
Subsequent to the bankruptcy filing, Winstar sued Lucent for $10 billion in
civil court, alleging that Lucent had failed to abide by a contract to provide
it with continued financing.
Winstar bonds are trading at around 2 on a price basis.
Avoiding A 'Long-shot'
When telecoms reach a price level that would be of interest to him, "they are
too far gone," says Herb Stiles, president of the T. Rowe Price Recovery Fund,
meaning beyond salvation.
However, there are some regional CLECs that "seem to have a business plan
that works," he adds. Such a plan would have to have a positive cash flow model
to be of interest to him.
Stiles says that with a company such as Teligent Inc. (TGNT), which filed for
Chapter 11 bankruptcy protection Monday, "nobody trusts himself to be able to
take the visionary view." For most investors, it is too much of a long-shot.
Teligent, based in Vienna, Va., sells phone and data services to businesses.
It recently received a second extension on a financing requirement related to
its bank credit line.
Some Survivors
One telecom that has caught the eye of a distressed debt player is XO
Communications (XOXO), a Virginia local telecom provider founded by billionaire
Craig McCaw.
It has been "caught up in a liquidity crunch," says Riyad Said, a managing
director and senior analyst at Friedman, Billings Ramsey & Co., an investment
bank located in Arlington, Va. There are "concerns about ongoing funding," he
adds.
However, he notes that Fortsmann Little & Co., a New York-based buyout firm,
recently made a $250 million investment in XO, which boosted Forstmann's total
holding in the company to $1.5 billion.
XO is "one of a handful of 25 to 30 troubled telecoms that will survive,"
predicted Harold Rivkin, who also likes Williams Communications Group, Inc.
(WCG), "which has deep pockets."
Williams owns a nationwide fiber optic network and is based in Tulsa, Okla.
It was recently spun off by the Williams Cos. (WMB), which provides information
and energy services.
"XO and Williams are trading at levels where they should hold their value,"
says Kingman Penniman, director of research at KDP Investment Advisors, a
high-yield research firm based in Montpelier, Vt.
Recently, the XO 10 3/4% of 2009 was trading at a price of 47, while the
Williams Communications 10 7/8%, also of 2009, was trading at a bid level of
52-1/2.
-By Michael C. Barr, Dow Jones Newswires; 201-938-2008;
michael.barr@dowjones.com
(END) DOW JONES NEWS 05-21-01
11:36 AM |
