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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Jerry Olson who wrote (42211)	3/5/2000 9:00:00 AM
From: Kip518	Read Replies (3) \| Respond to of 99985

Bankers and Internets -- apparently Paul is not yet convinced that Peter will forever be willing to buy worthlittle nutz-paper. March 04, 2000 22:11 ANALYSIS-Lenders not convinced by Internet alchemy By Nick Edwards HONG KONG, March 5 (Reuters) - Internet analysis is like the alchemy of the 21st century, with believers producing countless formulas to explain why shares in loss-making cyber firms rocket to sky high prices. But while equity market bankers seem to be devotees of the weird science, their credit market counterparts are slow to convert, sceptical of finding lasting value in the virtual world. They say the fundamentals of cash flow and profit remain vital benchmarks of assessing risk and the ability of Internet firms to pay back their loans. "You can come up with all kinds of ways of calculating it and justifying it to yourself, but it's like the emperor's new clothes," the Hong Kong-based director of lending risk management at one leading European bank told Reuters. And with such naked risk, "any Internet company going to the market to borrow would find it extremely difficult," he said. One Internet firm that seemingly didn't was Pacific Century CyberWorks , the Hong Kong upstart presently tapping the debt market for a loan of up to $12 billion to help fund its $38 billion takeover of Cable & Wireless HKT . It is the first time an Internet firm has gone to the credit market for pure debt funds on such a massive scale. Bankers say, however, the loan is less a bet on the risky loss-making, new economy and more a guaranteed earner secured against the assets and profits of a blue chip, old economy firm. Other Internet firms -- Amazon.com Inc and Softbank Corp -- have issued debt, but they are often convertible, subordinated bonds attractive to equity investors. LENDING DILEMMA Ratings agencies say the dilemma for lenders is clear. "So much depends at this point in time on access to further equity," Rob Richards, Asia Pacific managing director of corporate ratings at Standard & Poor's, told Reuters. "Lenders basically look to the ability of the business to generate the necessary cash to service the debt and pay it back and that's highly difficult to predict," he said. "The only way many of these companies can really do that is to issue more equity. They're living off their capital base." It's also a problem for the ratings agencies. They traditionally assess the risk of operating in a given business segment to predict credit strength, the ability to avoid default and at what that all hinges on. "We are not likely to put a great deal of weight on a high dependence on future equity valuations and the ability to issue equity down the line, nor on the sort of valuations driven by things other than cash flow and profitability within the timeframe that the debt has to be serviced," Richards said. Which is why what little Internet debt there is in the market tends to carry a high yield, speculative rating, or none at all. Amazon.com's February issue of 690 million euros ($662 million) of 10-year convertible subordinated notes, for example, was rated Caa3, a low junk grade, by Moody's Investors Service. But there does seem to be a desire among communications and Internet-related firms to plug into the debt market. Analysts say about 80 percent of some $9.5 billion worth of speculative grade bonds launched in the first two months of the year were communications related. EVIDENCE FOR CHANGE LACKING But long term lenders say they are still short of evidence to support a change of heart regarding the Internet. "Banks are still in the process of finding a benchmark to assess the risk," said Stephen Ching, vice president and head of syndications at Credit Lyonnais in Hong Kong. "They are changing, but it's hard for banks to change in a heartbeat." Lenders in traditional commercial banks hold risk to the final maturity, while equity underwriters sell down and pass on much of their risk over a few months. "Their risk tolerance can be quite high because they have only a short exposure," Ching added. This is why, in part, the venture capital arms of banks are willing to place bets on Internet start-ups, despite warily admiting they cannot properly assess their investment risk. Venture capital loans are only a few million dollars at a time or less and the appetite for Asian Internet equity is seemingly insatiable, enabling banks to swiftly sell off downside debt risk to investors in the equity market. Ching says the gap between the two sides of the banking business is narrowing, but is far from closed. S&P's Richards says Internet firms will also have to start delivering some traditional measures of cash flow and profit if they are to become regular customers of the debt market. "With current equity market valuations they have a virtual currency at their disposal, but at some point their going to have be operating businesses that deal in real currency," he said. "We're looking very closely at the risks and strengths of the Internet sector, but the idea that somehow you can use the future ability to issue new equity to repay your maturing debts is not something we can place significant reliance on." (US$1= 0.96 euro)