TT Finance
Nextel slashes debt, cuts $857m
By Jonathan Stempel, Reuters
Tuesday, August 28, 2001
Even the biggest names in the battered telecommunications sector have concluded
it's better to get rid of debt than it is to live with it.
Nextel Communications Inc. said on Monday it is exchanging $857 million of senior
debt of its Nextel International Inc. wireless unit for 21.6 million shares of Nextel
common stock, now worth about $274 million. It said it will record an unspecified
one-time gain for the swap.
The Reston, Virginia-based wireless phone company, backed by billionaire Craig
McCaw, joins "junk" rated telecoms such as Level 3 Communications Inc. and XO
Communications Inc., in saying this summer they are buying back debt,
exchanging it for stock, or considering doing either.
"It is a great deal for Nextel, and it conserves their cash," said Eric Tutterow,
high-yield analyst for KDP Investment Advisors Inc. in Chicago. "They're giving
away about $270 million of stock to retire $857 million of debt."
Nextel had about $17.3 billion of debt and $4.7 billion of cash and cash equivalents
as of June 30, according to a securities filing. The swap cuts its debt load 5
percent.
It owns 99 percent of Nextel International, whose wireless operations are mostly in
Latin America and whose low debt ratings were put on review for downgrade on
Aug. 1 by Moody's Investors Service. On March 15 Nextel International abandoned
a initial public offering because of weakness in telecom stocks.
The debt being swapped includes $422 million of 13 percent notes maturing in
2007, $241 million of 12.125 percent notes maturing in 2008 and $194 million of
12.75 percent notes maturing in 2010.
Nextel's vice president of investor relations, Paul Blalock, said Nextel completed
the swap "because we could. The stars aligned in terms of public market trading
value and opportunity." He did not say who initiated talks for the swap.
The swap will dilute Nextel's shares about 3 percent. Nevertheless, the company's
shares closed Monday on the Nasdaq at $12.71, up 17 cents. They have fallen 49
percent this year.
Nextel's 9.375 percent notes maturing in 2009 rose on Monday about 2 cents on
the dollar to a 75 cents bid, while Nextel International's 12.75 percent notes
maturing in 2010 rose about 5 cents on the dollar to a 30 cents bid.
'MANIC DEPRESSIVE' ON TELECOMS
Analysts said cutting debt can show Wall Street, which has in 2001 scorned all but
the most stable telecoms, that a company is committed to being fiscally
responsible.
"Wall Street reacted in almost a manic depressive sort of way to telecoms in the
wake of the dot-com blowups," said Robert Rosenberg, president of Insight
Research Corp., a Parsippany, New Jersey-based telecommunications research
firm.
A debt-for-equity swap, he said, can be "a way to tell Wall Street ... you're on fairly
solid footing."
Most of the new Nextel shares will be publicly offered by mutual funds run by
Fidelity Management & Research Co. or Capital Research and Management Co.,
the adviser for the American Funds, according to a securities filing.
Debt-to-equity swaps are gaining luster among telecoms. In recent weeks, Covad
Communications Group Inc. and Focal Communications Corp., have agreed to
swaps, but only after being prodded by disgruntled bondholders.
"Investors are still extremely cautious, and those doing debt-for-equity swaps are
usually doing it to play defense," said Peter Andersen, who invests $1 billion for
Delaware Management Co. and owns Nextel International bonds.
FEW OPTIONS
Nextel does not, unlike many telecoms, face persistent worries on Wall Street over
its near-term survival.
Like other telecoms' shares, though, Nextel's shares have taken a bath. They are
down 92 percent from their all-time closing high of $159.63 set on March 10, 2000 -
the day the Nasdaq also peaked, closing at 5048.62.
Aryeh Bourkoff, a high-yield telecom analyst at UBS Warburg LLC in Stamford,
Connecticut, said whether a debt-for-equity swap is appropriate depends on "the
makeup of the equity sponsorship, the size of the capital structure, the funding gap
as well as overall liquidity. In an environment where new financing is hard to come
by, and debt makes up a majority of the capital structure, equity holders have to
share the short-term pain, to create a long-term viable model."
Tutterow said Nextel is retiring about 37 percent of Nextel International's $2.3 billion
of debt. Nextel had about 740 million Class A shares on July 31, a securities filing
shows.
Analysts said it would be tougher for a company such as Broomfield,
Colorado-based Level 3, which last month got permission from banks to exchange
debt for equity, to do a swap. Level 3 shares closed Monday on the Nasdaq at
$3.92. Shares of XO, which is buying back debt, closed at $1.22.
"Nextel has a stock that is worth something," said Tutterow. "This kind of
transaction wouldn't be reasonable for an XO or a Level 3." |
