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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Ilaine who wrote (87208)	3/29/2001 12:34:16 AM
From: oldirtybastard	Read Replies (1) \| Respond to of 436258

That opinion of his is pretty much a death certificate for telecom equities, he's a smart dude, makes me want to go nuclear short. Here's some other fun highlights: Brett D. Fromson: How badly have their balance sheets eroded? Ravi Suria: A lot of European PTTs have been downgraded four credit notches in the past 12 months and are still on credit watch-negative. It probably takes 10 to 15 years of organic growth for a company that size to move up the four credit notches they just gave up. That gives you a sense of the magnitude of the deterioration that has happened to these companies' credit profiles. Ravi Suria: There is no shortage of examples from those where restructuring seems imminent, like PSINet (PSIX:Nasdaq - news), Covad (COVD:Nasdaq - news), RSL Communications (RSLC:Nasdaq - news), Winstar Communications (WCII:Nasdaq - news) and Teligent (TGNT:Nasdaq - news), to those where the problems are a few quarters off still, like XO Communications (XOXO:Nasdaq - news), Williams Communications (WCG:NYSE - news), Exodus Communications (EXDS:Nasdaq - news) and Level 3 (LVLT:Nasdaq - news). Their common problem is that they simply have too much debt. The reason they can't sell out or expand is that their access to capital has been shut off because they have too much debt. Brett D. Fromson: I assume you're looking for a rash of bankruptcies among the New Economy telcos. Ravi Suria: Yes. Between 2001-04, I expect an unprecedented series of debt defaults. That basically means the debtholders will take over these companies, shareholders will not get anything and after the financial restructuring, the company comes out with little or no debt. I would say that about 80% of the New Economy telcos will have to restructure. Ravi Suria: Between 1996-2000, the high-yield market raised $502 billion, of which $240 billion was for telecom and media. To put this in perspective, throughout the 1980s, it raised only $160 billion. A key difference is that the companies that raised money using junk bonds in the 1980s were industrial companies with hard assets that generated positive cash flow and had products. So when you lent them money, you could say, "This company can generate enough cash flow to repay the debt." You wouldn't give them money otherwise. So, in some ways, the companies that borrowed in the '80s were a lot more creditworthy than the companies of the '90s. Brett D. Fromson: Let's sum up on the telecom service companies. Ravi Suria: This industry has by far the most egregious misallocation of capital -- of spending money when you are not making money, of borrowing money when you don't have the ability to pay it back. The sad part is that the industry that has done this never really existed before in the sense that the new companies did not exist before the Telecommunications Act of 1996, and the old guys had been in a regulated environment -- i.e., they never borrowed this much money before. What we're seeing right now is totally unprecedented. You don't know how bad it could get because we have never been here before. We have never seen balance sheets like this before. I will say one thing in general about balance sheets and distressed companies: Things are always worse than what you think. You learn that from any number of companies that have gone Chapter 11. Look at any number of companies -- from Boston Chicken (BOSTQ:OTC BB - news) to Discovery Zone (DVZN:OTC BB - news) to ICG -- people were optimistic until the last moment. Ravi Suria:Cisco (CSCO:Nasdaq - news), Lucent (LU:NYSE - news), Nortel (NT:NYSE - news), Corning (GLW:NYSE - news) and others. Brett D. Fromson: What are their problems? Ravi Suria: One, over the past five years, cash flow in the telecom services sector has been growing between 8% and 12%. But the money they have been spending on plant and equipment has been growing at about 40% a year. This is clear example of the recent investment-driven economy, that capex spending was dependent on the telecom services companies borrowing money. This is a great example of what I call overstimulation of demand through easy availability of credit. In the long run, investment demand is tied to how much money companies actually make. What this implies for the next three to five years is that telecom spending growth rates will be down to the actual cash flow growth, which is 8% to 12% a year. This is the best-case scenario -- assuming the cash flow is not used to start repaying debt -- which is an heroic assumption. Brett D. Fromson: Does the level of telecom service capex spending have to drop before it starts growing at all? Does the absolute level of capex spending increase from current levels, or does it have to go down substantially before it begins increasing? Ravi Suria: I expect aggregate capex will have to go down to 1998 levels, at least, before it resumes growing again. Brett D. Fromson: Why? Ravi Suria: Because a substantial amount of what was spent in 1999 and 2000 was money that companies did not have and had to borrow. A lot of the money borrowed by the big guys over the past few years is coming due in 2001. For example, European telcos alone have to raise about $190 billion this year to refinance existing debt. That is not to repay or bring down debt. That is a lot of money. So, the first $190 billion raised through bank loans, bond market offerings and wireless IPOs will be used to refinance existing debt. If they manage to borrow that much money, then they may start spending on capex. Maybe. In the U.S., for example, AT&T has $25 billion of commercial paper coming due this year. None of these financial pressures existed over the last several years. The debt that you borrowed you could spend on equipment. Brett D. Fromson: After the revenue contraction, when would you expect revenue levels to return to 1999-2000 levels? Ravi Suria: That's hard to say. For companies to spend money on telecom equipment, they have to get it from somewhere -- internal cash flow or the capital markets. In the last few years, it has come from the markets. On the telecom services side, people are beginning to understand that these are no longer growth companies -- they are highly leveraged companies. On the telecom equipment side, the market will realize that they never were secular growth companies. They are capital equipment companies; they're cyclical just like the semiconductor equipment companies. You don't find semiconductor equipment companies giving vendor financing for customers to buy their equipment because they know there's always a downside to a cycle. This is something the telecom equipment manufacturers forgot.