The banks were spared from the telecoms dot.coms collapse.
Banks in the debt crysis of the 1980 and the real estate crysis of the early 90's suffered. In the telecoms debacle they are not suffering says the FT.
But first some explanation:
Jay, the oil boom years generated the Latin American debt crisys -into which all those recycled petrodolars went.
But the capital coming back from indebted nations was invested in real estate and generated the real estate bubble of the ned of the eighties.
Banks suffered in both cases. But they were spared from the telecoms and dotcoms debacle:
Prudence is cast aside as vendors and customers slip deep into financial whirlpool
by Richard Waters
Published: July 16 2001 09:53GMT | Last Updated: July 17 2001 17:04GMT
Latin America in the early 1980s, real estate in the early 1990s - telecommunications in the early 2000s?
The telecoms industry has developed many of the hallmarks of the sort of financial black hole that periodically lays waste the capital markets. And like those earlier financial disasters, this is one that will not pass in a hurry.
Its effects will stay with the industry for some time to come, as ailing carriers struggle to overhaul their previously imprudent financial strategies and investors and lenders steer a wide berth.
The process of sorting this mess out has only just begun, with a series of high profile bankruptcies in the US. But with a mountain of debt still to be shifted and waning asset values, the resolution will not be quick.
"Some of the big balance sheets have got to be fixed first," says Jack McMaster, chief executive of KPNQwest, the European joint venture between the Dutch and US telecoms concerns. Until then, there is little hope of investment returning to the industry.
The nature of the financial disaster has been different on either side of the Atlantic, though it is based on some common elements. An industry built on the prudent finances of the staid utilities world was suddenly catapulted into the forefront of the information revolution. The technological change that led to the emergence of the internet, along with global deregulation, seemed to offer a promise of huge growth ahead.
The prospect of much higher revenue growth rates in turn encouraged telecoms companies to construct financial models that included far larger slugs of debt. The cash generated by new services would support all the borrowing and bring much higher returns for equity investors.
Those assumptions have proved fallible on two counts. One is that they did not adequately take account of the effects of competition. Technology and deregulation have indeed transformed the telecoms industry: but while that created an opening for new entrants, it has not created a big enough market to support all the new companies that have been formed.
The other mistake was to assume that growth rates in the telecoms industry were moving to a permanently higher level. In fact, last year's dotcom collapse had a much more far-reaching effect than seemed likely at the time, as the financial markets cut off the supply of cash to the telecoms and technology industries.
"What we didn't anticipate was the breadth and depth of the pull-back in the capital markets and its effect on a much wider base of customers than we expected three or four months ago," says Jim Crowe, chief executive of Level Three Communications, a US telecoms company that has had to overhaul its business plan because of changed circumstances.
In Europe, these problems have been made far worse by the scramble touched off by last year's third-generation auctions. The E100bn bet on high-speed wireless data services could take years to pay off. Its short-term effect has been to heap debt onto the weakening balance sheets of incumbent carriers. Within a remarkably short space of time, companies that enjoyed triple-A or solid double-A credit ratings have been relegated to single-A or below.
US telecoms companies have so far been spared this sort of financial drain. Indeed, there has been an audible sigh of relief from wireless companies as it has become clear that the US will not meet its original timetable of holding a third-generation auction by September next year.
Instead, the American telecoms industry has been shaken by a somewhat different financial meltdown. The deregulation touched off by the Telecommunications Act of 1996 led to the emergence of a new group of companies, known as competitive local exchange carriers (CLECs). By building their own local networks, these companies have become the first real challengers to the local Bell networks in the 100-year history of the US telecoms industry. But the cost of those facilities has been vast, prompting heavy borrowing in the sub-investment grade markets in the late 1990s.
A parallel wave of investment in the long-haul optical fibre networks that act as the backbone of the internet has produced a similar surge in capacity.
Having built their new networks, however, many of these companies are finding it more difficult than they expected to win customers. Capacity growth has outpaced the growth in demand, pushing down returns on investment. And with large amounts of debt to be serviced, the penalty for missing revenue targets can be huge. Three companies alone - Winstar, Teligent and the Canadian carrier 360 Networks - have filed for bankruptcy with combined borrowings of billions of dollars since the spring. In an echo of similar problems among emerging telecoms companies in Europe, fibre optic network operators Viatel and GTS have also struggled under heavy debts.
The losses from disasters like these have indeed been huge. But they have also been spread widely in the financial world - unlike the Latin American and real estate crashes, where losses were concentrated in the banking system and threatened to bring down some of the world's biggest financial institutions.
The banking system has supplied around $250bn of debt to the telecoms industry over the past two years, according to Andrew Dennis and Ian Hardington, who have been instrumental in financing telecoms companies at USB Warburg in London. Much of this has now been recycled through the bond markets, they add, with a series of giant bond issues by investment-grade telecoms companies this year.
In cases where financial losses from the telecoms debacle have been concentrated, they have tended to fall outside the traditional financial system. For instance Hicks Muse, the US buy-out firm, invested more than $1bn in financially troubled companies Teligent, Rhythms NetConnections, Viatel and ICG Communications.
Some telecoms equipment makers have also taken big hits under vendor financing deals that were arranged to help customers buy their equipment. Providing this form of financing has in the past proved a successful strategy, says Jim Andrews, a partner at Adventis, a US telecoms consultancy: but problems have arisen from the way that companies such as Lucent Technologies have aggressively turned to financing as a way to make up lost ground after they have fallen behind in a a market, he adds.
The coming months will determine just how many over-indebted telecoms companies are able to escape their financial problems - and how many are forced into distressed asset sales or bankruptcy.
As the downward spiral of KPN's share price shows, a big debt load can be hard to shift. News that it was weighing a rights issue to raise equity sparked a collapse in the Dutch carrier's share price. With few other options to raise cash, vulture investors are now licking their lips at the chance to buy some of KPN's assets on the cheap.
Private equity funds that specialise in telecoms have around $20bn of cash on hand to take advantage of these sorts of opportunity, according to UBS Warburg. Add in leverage, and this could amount to $50bn or more of firepower.
For many, though, there will be no alternative but bankruptcy. And even companies with large cash reserves still on hand may not survive.
Level 3, for instance, still has access to around $4.6bn for an ambitious international network. But investors, burned by big losses elsewhere in the industry, may not have the patience to see it through.
"I don't care if they have got $4bn of cash - unless someone lends them a lot more money, they won't make it," says Joe Nacchio, chief executive of Qwest.
Level 3 claims it has enough cash to survive the capital markets' bleak winter and come out the other side as one of the survivors. Many telecoms companies, however, will not make it.
Investors feel pain of telecoms industry collapse
By Richard Waters and Gary Silverman in New York
Published: July 19 2001 20:22GMT | Last Updated: July 20 2001 00:40GMT
The collapse in the telecommunications industry is cutting a swathe through the earnings of leading US companies that invested in the sector, according to quarterly figures released in recent days.
Along with the bursting of the technology bubble in the financial markets, the debacle also looks set to rob many companies of a source of profits that has in the past few years had a powerful impact on their performance.
Microsoft, which had mounted a series of investments in telecoms and cable companies, confessed last week to having to take writedowns of $3.9bn (E4.5bn) on its holdings. Many of its investments - such as $5bn in AT&T to support an acquisition of cable company MediaOne - were made near the peak of the communications investment boom. The charge virtually wiped out earnings for the quarter at one of the most profitable US companies.
Soured telecoms investments have also driven down second-quarter earnings by billions of dollars at leading US banks. Wells Fargo, JP Morgan Chase and FleetBoston Financial have this week reported charges or writedowns of $1.1bn, $1bn and $290m, respectively, that were related to private equity investments. The bulk of that was tied to investments in the battered telecoms industry.
The corporate writedowns are the latest sign of one of the biggest collapses to hit the stock and bond markets in recent years. While the soaring share prices of dotcom companies hogged the headlines in the late-1990s, the massive capital investments required for communications networks meant that telecoms companies raised far more cash through the stock and bond markets.
For now, the telecoms debacle has left the banking industry with relatively few loan losses. However, Charles Peabody, banking analyst at Mitchell Securities, said managements were also beginning to blame telecoms credits for rises in non-performing assets, making it likely that more problem telecoms loans would surface later in the year. Equity investors usually take their losses before debt holders, he added.
For many of the tech companies that had come to look on investment gains as a reliable source of profits, meanwhile, the picture has changed completely. Intel said earlier this week that writedowns of $220m had wiped out virtually all of its investment gains for the latest quarter, while it would suffer a net $100m investment loss for the coming quarter. Last year, its investment profits averaged $940m a quarter.
This quarter's private equity reversals at the banks were also troubling because they largely reflected their inability to sell out of private investments - rather than fluctuations in listed holdings.
Earnings at JP Morgan Chase, for example, have been buffeted for several quarters by the changing value of its listed holdings. But these were largely paper losses. Last quarter, the banks said they were losing money on their private holdings as well. Realising value from such investments requires new rounds of financing, and the banks were admitting that they see no exit.
Jeffrey Walker, who heads JP Morgan Partners, said the bank reckoned that "over the next 12 to 18 months...the financing environment for telecoms and tech deals will be pretty hard".
Mr Walker said he saw increasing opportunities for private equity investments in the coming months. But he made clear that his focus would be outside telecoms - in sectors such as life sciences and industrial companies.
"Our goal was to have a diversified portfolio," he said. "A return to a globally diversified model is where we want to be." |
