AOL Bonds Trade Barely Better Than Junk
Reuters Internet Report
By Jonathan Stempel
biz.yahoo.com
NEW YORK (Reuters) - AOL Time Warner Inc. (NYSE:AOL) may have a gaggle of big brands under its roof that range from Internet giant America Online to cable television network Home Box Office and the Warner Brothers film studio, but bond investors say the company is barely better than junk.
"It's a very complex company," said Daniela Spassova, managing director of fixed-income research at Principal Capital Income Investors in Des Moines, Iowa. "Investors think AOL is much riskier than Disney and Viacom."
Since early April, AOL bonds -- rated "Baa1" by Moody's Investors Service and "BBB-plus" by Standard & Poor's, the third lowest investment grades -- have badly lagged those of media rivals Walt Disney Co. (NYSE:DIS) and Viacom Inc. (NYSE:VIA).
Investors say they are skeptical because AOL has missed earnings targets, has too much debt, lacks a plan to move 34 million America Online subscribers to high-speed Internet access, and -- like General Electric Co. (NYSE:GE) and Tyco International Ltd. (NYSE:TYC), whose bonds have been hurt this year -- is too hard to understand.
On top of this, investors said recent bond weakness afflicting phone companies Qwest Communications International Inc. (NYSE:Q) and WorldCom Inc. (NasdaqNM:WCOM) is enveloping AOL.
"It's one of those sympathy trades," said Steve Bohlin, who helps invest $2.2 billion for Thornburg Investment Management Co. in Santa Fe, New Mexico, and owns AOL bonds. "Any company that looks like it has a large debt load and is being hit on the revenue side is being hurt pretty hard."
BONDS WEAKEN
AOL on April 3 sold 10-year notes, part of a $6 billion bond sale, at 99.05 cents on the dollar to yield 7 percent, or 1.68 percentage points more than 10-year U.S. Treasuries.
The bonds weakened immediately. By this week, they had fallen to about 93.5 cents, pushing their yield above 7.8 percent, or 2.6 percentage points more than Treasuries.
Investors say that gap suggests a mid- or low "triple-B" rating. The yield margin is barely below the 2.7 percentage point gap on bonds of junk-rated Tricon Global Restaurants Inc. (NYSE:YUM), which runs the KFC, Pizza Hut and Taco Bell chains.
In contrast, Disney's 10-year notes yielded 1.55 percentage points more than Treasuries, and Viacom's just 1.5 percentage points more than Treasuries, little more than they yielded in early April, investors said. Disney and Viacom are rated "A3" by Moody's and "A-minus" by S&P, one notch above AOL.
"Viacom is a premier name, and is more economically sensitive because of large advertising revenues," said Spassova, whose firm owns AOL, Disney and Viacom bonds. "If you believe in an economic recovery, Viacom should benefit most."
Disney, she said, "has less upside and more downside because of its incomplete business model. It needs more distribution, and needs to buy more assets."
PROBLEMS, PROBLEMS
AOL, in contrast, has many problems, analysts said.
As it struggles to revive growth at the online unit, it is shelling out $6.75 billion to buy back Bertelsmann AG's (Dusseldorf:BTGGga.D) stake in money-losing AOL Europe.
Wall Street also frets AOL may have to stretch its balance sheet further by paying to resolve two cable-related ventures with the Newhouse family and AT&T Corp. (NYSE:T) .
Meanwhile, shares of AOL Time Warner closed Wednesday at $18.36, after starting the year at $32.10.
"A couple of years ago, when fast-growing companies bought slower dinosaurs -- Qwest bought US West and AOL bought Time Warner -- the markets viewed it unfavorably, thinking the new fast growers were sacrificing growth," said Gary Pzegeo, who helps invest $4.5 billion as vice president for Gannett Welsh & Kotler Inc. and does not own AOL bonds. "Those transactions turned out in a sense to be lifesavers because (otherwise) the old AOL and the old Qwest might not be around today."
That doesn't help AOL bondholders now, and at current prices even equity investors are valuing the online unit at zero. "People are having a really tough time valuing that (AOL) portion of AOL Time Warner," said Pzegeo, who works in Boston.
Richard Parsons, who takes over as chief executive at AOL's May 16 shareholder meeting from the retiring Gerald Levin, has told investors not to expect AOL to write a check to resolve the AT&T issue and that AOL is looking at several options, including a possible spinoff of its cable operations.
Bohlin sees room for AOL bonds to rise. "The current levels look a little cheap," he said. |
