Telecoms Deal with Debt by Just Getting Rid of It
By Jonathan Stempel
NEW YORK (Reuters) - Emerging telecommunications companies are now finding a new way to deal with their enormous and often crushing debt loads.
Their solution: get rid of the debt.
At least four telecoms -- Covad Communications Group Inc. (COVD.OB) and Focal Communications Corp. (Nasdaq:FCOM - news) this week, and Level 3 Communications Inc. (Nasdaq:LVLT - news) and XO Communications Inc. (Nasdaq:XOXO - news) last month -- have recently announced they are either buying back their own debt or exchanging that debt for common stock, or are at least considering doing so.
The announcements have helped spark gains in long-battered telecom junk bonds. They may also give hope to junk bond investors burned by a string of telecom bankruptcies.
``Given the state of the telecom market and the pain many investors have endured, there's a greater desire to 'call it a day' and for investors to get what they can,'' said Edward Mally, head of high yield research at CIBC World Markets Corp.
This leaves investors looking either to latch onto survivors, or to keep telecoms from spending too much or otherwise ensuring their bond investments don't get wiped out.
``For a company buying back debt, it may mean it has some confidence going forward, that its business is sound and that it may be able to raise more capital with a cleaner balance sheet,'' said Riyah Said, managing director at Friedman Billings Ramsey & Co. in Arlington, Virginia. ``For a company changing debt into equity, it may provide it more time and flexibility in future capital raising.''
LEVEL 3, XO RISE
Junk-rated telecom bonds -- those rated ``Ba1'' or lower by Moody's Investors Service and ``BB-plus'' by Standard & Poor's -- have returned 2.08 percent, including interest and price changes, in August, compared with 1.03 percent for junk bonds overall, according to Merrill Lynch & Co.
Benchmark bonds of Level 3, a Broomfield, Colorado-based fiber-optic network provider, and XO, a Reston, Virginia-based voice and data services provider, have done even better.
Last month, Level 3 said its banks gave it permission to exchange some of its debt into stock, while XO said it may buy back some debt; analysts said XO now has. Moody's said Level 3 recently had $8.2 billion of debt, and XO $6.3 billion.
Their benchmark debt is up 11.5 and four cents on the dollar since June 29 to a respective 55 and 33 cents, according to KDP Investment Advisors Inc. of Montpelier, Vermont.
``Deleveraging and reducing interest burdens would be a fundamental positive for bondholders,'' said Aryeh Bourkoff, high-yield telecom analyst at UBS Warburg LLC in Stamford, Connecticut, who recommends that investors buy XO bonds.
BONDHOLDERS TURN AGGRESSIVE
Not all of the restructuring is by choice.
Covad, a high-speed Internet access provider, plans to wipe out its $1.4 billion debt load by giving bondholders 19 cents on the dollar plus preferred stock, part of a likely bankruptcy filing next week. Bondholders had challenged the Santa Clara, California-based company to restructure.
``The uncertainty of equity value is certainly better than the certainty of not getting interest payments,'' said Mally.
Meanwhile, Chicago-based Focal, which provides Internet access and telephone services, on Thursday arranged for several of its junk bond holders to exchange about $280 million of debt into a 35 percent equity stake.
``Perhaps companies are realizing it's time to talk to bondholders and come up with a solution for their capital structures,'' said Katie Heagy, an investment analyst for Federated Investors in Pittsburgh.
Indeed, bondholder activism is rising. Last week a bondholder sued Rochester, New York-based Mpower Communications Corp. (Nasdaq:MPWR - news) to declare the Internet access and telephone services provider insolvent or nearly insolvent -- so it can get its money back before, it fears, Mpower fritters it away. Mpower called the lawsuit ``baseless'' and has countersued.
Lawyers expect more such activism, and Said expects more debt restructurings, even if it means diluting shares.
``There's nothing more dilutive than running out of money,'' according to Said. |
