May 22, 12:08 pm Eastern Time
Telecoms bonds can't fight that sinking feeling
By Jonathan Stempel
NEW YORK, May 22 (Reuters) - On Monday, Teligent Inc. (Nasdaq:TGNT - news) filed for bankruptcy protection from creditors. It listed $1.65 billion of debt.
By some measures, that's a drop in the bucket.
In early May, Viatel Inc. filed for court protection, listing $2.68 billion of debt. A month ago, it was Winstar Communications Inc.'s turn; it listed $5 billion.
In January, NorthPoint Communications Inc. sought the bankruptcy court's help. Experts said it's only a matter of time before PSINet Inc. (OTC BB:PSIX.OB - news) follows suit.
Welcome to the ever-expanding world of bond defaults by upstart telecommunications companies. And like the bottomless cup of coffee, analysts see no end to them.
``We were all counting on substantial growth in the telecom sector,'' said Katie Heagy, an investment analyst specializing in media and telecom at Federated Investors in Pittsburgh.
``The question investors are now asking themselves is whether that growth will in fact ever be there,'' she said.
Including Teligent, which had $740 million of unsecured bonds, U.S. telecoms -- which comprise 20 to 33 percent of the U.S. junk bond market, depending on who's counting -- have defaulted on $13.3 billion of debt this year, according to credit rating agency Fitch.
Moody's Investors Service, another credit rating agency, puts the total, excluding Teligent, at $10.5 billion, out of $29 billion of defaults from all U.S. companies. In all of 2000, it said, there were just $6.5 billion of U.S. telecom defaults.
Fitch, for one, expects the total to reach $15 billion to $20 billion for the year. That is, if one counts only those companies most at risk.
The saga of how investors, telecoms and their money parted ways, like the life spans of many of the telecoms, is short.
And it isn't pretty.
"The honeymoon is over," said John Page, a Moody's senior
analyst.
DEREGULATION FAILS
Five years ago the U.S. Congress deregulated local phone
markets. This led dozens of companies to build state-of-the-art networks, expecting a surge in demand and a gush of profits.
``At that time the public debt and equity markets were ready for investment in an emerging telecom sector,'' said Page.
``We had just had a wave of IPOs (initial public offerings) of dot-coms and ISPs (Internet service providers), and these required bandwidth,'' he continued. ``It seemed a very logical place for investors to put their money, and the environment was that companies could effectively get capital on demand.''
But that was before Baby Bells such as SBC Communications Inc. (NYSE:SBC - news), and Bell Atlantic and NYNEX, now part of Verizon Communications Inc. (NYSE:VZ - news), started making inroads.
Profits suddenly seemed more like a pipe dream. Lenders and investors got impatient, and the capital markets seized up.
``With tight capital market conditions, combined with a weakening economy, it's hard to have a lot of clarity'' about telecoms' prospects, said Heagy.
Indeed, many of these companies are not now giving investors cause to wait around. After a default, creditors, especially unsecured ones, often don't get their money back.
``In the first quarter, the average price of defaulted telecom issues, one month after default, was 11 cents on the dollar,'' said Mariarosa Verde, a Fitch senior director. ``That means the losses on these defaults are severe.''
``CUSP'' NAMES
What shocked many is how fast the malaise spread.
``We've been surprised by the speed at which everything gets in trouble,'' said Wayne Morgan, senior vice president at Wachovia Asset Management in Winston Salem, N.C. ``At the first sign of liquidity problems, spreads (bonds' yield margins over that of U.S. Treasuries) just gap out.''
That has hurt junk bonds as a whole.
Though the bonds have returned nearly 6 percent so far this year, essentially retracing last year's telecom-driven losses, it is the better quality bonds leading the way up, according to Merrill Lynch & Co. Junk bonds on average still yield about 12.5 percent, Merrill Lynch said.
What remains to be seen is whether better-regarded telecoms will follow their weaker brethren into the morass.
A common target of investor concern: XO Communications Inc. (Nasdaq:XOXO - news), a Reston, Virginia-based voice and data services company.
Its 10.75 percent notes maturing in 2009 were recently bid at just 47.5 cents on the dollar. That level suggests investors don't know what to think. This, even though XO said in April it has enough cash to keep running into 2003.
``People are worried about companies on the cusp of being survivors,'' said Heagy. ``XO is right on the cusp -- great assets, great management team, but will it find enough customers to meet its $375 million revenue target by the fourth quarter?''
It needs that to avoid defaulting on its bank credit lines, she said. XO's first quarter revenues totaled $277 million.
In the end, analysts said, junk telecom bonds will remain too risky for many investors, even ones with strong stomachs.
``I don't see how investors can protect themselves if they own the bonds now,'' said Verde. |
