Friday January 4, 10:07 am Eastern Time
CORRECTED - Telecom bonds 2002: Hell, purgatory and heaven-SSB
By Jonathan Stempel
NEW YORK, Jan 3 (Reuters) - The online Merriam-Webster dictionary defines ``heaven'' as ``a place or condition of utmost happiness;'' ``purgatory'' as ``a place or state of temporary suffering or misery,'' and ``hell'' as ``a place or state of turmoil or destruction.''
Welcome to the universe of junk-rated telecommunications bonds, circa 2002, according to Salomon Smith Barney, the unit of Citigroup Inc.(NYSE:C - news)
Salomon, in a new report, divided up the remaining telecoms among those that are alive and kicking, those looking for a nearby respirator, and those beyond hope.
Many telecoms grew out of the Telecommunications Act of 1996, which was designed to promote competition. They raised tens of billions of dollars and assumed they could find plenty of customers and raise more cash as needed. Many were wrong, resulting in dozens of telecom bankruptcies since early 2000 from companies such as ExciteAtHome Corp.(OTC BB:ATHMQ.OB - news), PSINet Inc. and Winstar Communications Inc.
Telecom hell, Salomon said, includes companies facing ``near-term restructurings or bankruptcies,'' with bonds trading around the mid-20s, in cents on the dollar, or lower.
Purgatory, it said, includes ``companies in a state of flux that will remain there until a positive or negative credit event occurs'' but with ``sufficient liquidity to remain viable'' in the near to medium term.
And heaven, it said, includes likely ``survivors'' that have ``real businesses and liquidity, that shine brightly in the darkness that surrounds them.''
Among those companies in heaven, Salomon said, are Allegiance Telecom Inc.(NasdaqNM:ALGX - news), Broadwing Inc.(NYSE:BRW - news), FairPoint Communications Inc. and all wireless providers, including Nextel Communications Inc.(NasdaqNM:NXTL - news)
Purgatory, it said, is home to FLAG Telecom Holdings Ltd. (NasdaqNM:FTHL - news), Focal Communications Corp.(NasdaqNM:FCOM - news), Level 3 Communications Inc.(NasdaqNM:LVLT - news), Metromedia Fiber Network Inc. (NasdaqNM:MFNX - news) and Williams Communications Group Inc. (NYSE:WCG - news).
Those telecom companies in hell, according to Salomon, include Adelphia Business Solutions Inc.(NasdaqNM:ABIZ - news), Global Crossing Ltd. (NYSE:GX - news), McLeodUSA Inc. (NasdaqNM:MCLD - news) and XO Communications Inc.
The labels reflect a changed tune for Salomon, which has in the past helped sell bonds for at least eight of the companies it says are now in purgatory or hell.
In December 2000, Salomon divided junk-rated telecoms into ``A'' and ``C'' companies. It said ``A'' companies would grow in scale, improve margins and see their bond prices rise, while ``C'' companies could expect a struggle. At the time, Salomon labeled the nine companies now in purgatory or hell as ``A'' companies.
Junk bonds carry low ratings from Moody's Investors Service and Standard & Poor's because of their credit risks, including the possibility that they may be unable to pay bondholders.
OUTLOOK
Salomon said the ``high-profile'' restructurings by McLeodUSA and XO, involving the retirement of billions of dollars of debt and new cash infusions by private equity firm Forstmann Little, will dominate the junk telecom bond market this half.
Bondholders of telecoms in hell, Salomon said, should be willing to hold equity in the intermediate- to long-term. The McLeodUSA and XO restructurings, it said, ``set the blueprint'' for other potential restructurings, ``particularly'' for a company such as Adelphia Business Solutions.
McLeodUSA's bonds, it said, may be worth a look because a bondholders' group is trying to increase their value. On the other hand, it said, a delay in completing the restructuring could trigger a bankruptcy. McLeodUSA said on Wednesday it skipped Jan. 1 interest payments on three bond issues.
Global Crossing, in contrast, ``sits in the lowest rung'' of the hell category, Salomon said, given its heavy debt load, Salomon's ``concern over management's credibility'' after the company missed quarterly guidance by a big margin and Salomon's concerns about the company's ``inherent viability as a business.''
Salomon said to ``avoid'' the company's bonds.
As for telecoms in ``purgatory,'' Salomon said FLAG Telecom ``resides closest to heaven,'' so long as it finds new customers, given its comparatively modest capital spending needs and business plan. Focal and Metromedia also need more customers to ascend to heaven, Salomon said.
Between Level 3 and Williams, two of the biggest junk bond issuers, Salomon said Level 3 is the closer to heaven because of its ``superior cost structure'' and ``the best management team in the industry.''
As for heaven-sent telecoms, Salomon said Broadwing is ``safest in heaven because its core operations, Cincinnati Bell, ''generate strong, stable cash flows.`` FairPoint, it said, has demonstrated its ability to improve margins. But Allegiance, it said, while ''well-run,`` is closer to ''purgatory" because of general woes in its sector. |
