Telecom suppliers' Argentina exposure seen in mlns
Thursday March 7, 2:21 pm Eastern Time
By Ben Klayman
CHICAGO, March 7 (Reuters) - Some of the world's biggest telecommunications equipment makers, including Cisco Systems Inc. (NasdaqNM:CSCO - news), Lucent Technologies Inc. (NYSE:LU - news) and Nortel Networks Corp. (NYSE:NT - news) (Toronto:NT.TO - news), have millions of dollars of exposure in troubled Argentina, according to industry analysts.
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Most firms have already taken reserves for any potential Argentine losses and industry sources said losses stemming from the Argentine economic crisis will not break the bank for the equipment makers.
``Losing a few hundred million bucks may seem painful, but it's not going to make or break Motorola or any other infrastructure vendor,'' said Herschel Shosteck, chairman of wireless consulting firm Shosteck Group.
In Argentina, the firms are not expected to take as big a financial bath as Motorola Inc. (NYSE:MOT - news) did in Turkey when wireless operator Telsim defaulted on a $2 billion Motorola loan. Motorola has since tightened its customer financing policies.
However, the financial meltdown and currency devaluation in Argentina are in some ways similar to Turkey's crisis, they said.
At the center of the exposure is vendor financing -- the practice of equipment suppliers providing loans to customers as part of an agreement to buy the suppliers' gear. All the major telecom equipment providers have accumulated billions in vendor financing debt on the books, most of it in the United States.
Vendor financing became popular in recent years as suppliers rushed to tap the market for equipment to direct data flow on the Internet. The financing created customer loyalty and generated interest payments, analysts said.
VENDORS ``CANNOT BE A BANK''
But the practice poses not only the risk of loan default but also cash-flow problems as the supplier loans both money and equipment.
There are also currency risks as the buyers of the equipment earn money in local currency and must repay loans in dollars, said Jay Taparia, a finance professor at the University of Illinois-Chicago.
``If you're giving vendor financing, you're essentially becoming a bank, and a telecom company cannot be a bank,'' Taparia said.
During the telecom meltdown in the past 18 months, several vendor-financing deals have blown up in suppliers' faces.
While the biggest was Motorola in Turkey, NII Holdings Inc., Nextel Communications Inc.'s (NasdaqNM:NXTL - news) international unit, said it had defaulted on $382 million in vendor financing owed to Motorola, which has about a 15 percent stake in Nextel.
The Nextel unit said in January it had hired an advisor to weigh options, including bankruptcy. It later said it is seeking to restructure its obligations.
UBS Warburg analyst Jeffrey Schlesinger said the default could result in a charge for Motorola, but it will not affect Motorola's liquidity materially.
Impsat Fiber Networks (NasdaqNM:IMPT - news), a Latin American telecom services provider whose investors include British telecom giant BT Group Plc (quote from Yahoo! UK & Ireland: BT.L), said in January it missed an interest payment on senior notes due 2008. Lucent and Nortel have provided it with vendor-financing loans.
Also in January, AT&T Latin America Corp. (NasdaqNM:ATTL - news), a subsidiary of U.S. long-distance telephone giant AT&T Corp. (NYSE:T - news), signed agreements for almost $300 million in vendor financing from Cisco, Lucent and Nortel. Last month, the high bandwidth services company posted a slightly wider fourth-quarter loss and restructured debt with its parent.
Canadian fiber-optic network builder 360networks Inc. (Toronto:TSX.TO - news), which had dreamed of building a worldwide network including in South America, last June filed for bankruptcy protection. Before that, French telecom equipment maker Alcatel (NYSE:ALA - news) wrote off $700 million in convertible bonds in 360networks.
In 2000, Argentine data services provider Diveo raised $500 million in vendor financing from Sweden's Ericsson (NasdaqNM:ERICY - news) and another $100 million from Lucent. In the past year, however, Diveo has struggled, analysts said.
DEFAULTS EXPECTED
Shosteck said he expects Argentine debt held by equipment makers may have to be renegotiated at 40 cents to 50 cents on the dollar. Others were more pessimistic.
``I actually expect a few companies to default (on their loans),'' said Jose Otero, a consultant with telecom consulting firm Strategis Group.
The Argentine exposure is just part of billions of dollars in industry vendor financing.
Lucent had $2.5 billion in vendor financing commitments at the end of last year, down from $7.5 billion at the end of 2000. It does not break out regional exposure, but a spokeswoman said the world's largest maker of telecom gear had taken reserves against any potential losses.
Lucent was listed as a creditor of Global Crossing Ltd. (NYSE:GX - news), which recently filed for bankruptcy protection and was a big player in Argentina. Global Crossing said it owed $31 million to Lucent, which said the total was actually $123 million.
Cisco had $1.7 billion in vendor-financing commitments at the end of January and had not taken reserves against less than $100 million of that total, meaning its potential exposure is low. Latin America accounts for 4 percent of overall revenues, but Argentina is a small piece of that, a spokeswoman said.
Nortel at the end of last year had vendor financing commitments of $2.1 billion, down from $4.7 billion at the end of last March. The Canadian company does not break out regional exposure and declined to say how much Argentina or South America accounts for in sales. |
