Another day, another 52 week high!
=DJ Nextel Cleans House On Debt As Competition Mounts
11/26/2003
Dow Jones News Services
(Copyright © 2003 Dow Jones & Company, Inc.)
(This article was originally published Tuesday)
By Nicole Bullock
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Like a lot of telecom companies, Nextel Communications Inc. (NXTL) took on a heavy amount of debt in the 1990s to build out its business.
It managed to stay afloat in the dark years of the telecom bust, in part thanks to a shrewd and focused bet on corporate wireless services. Now, in the last year or two, the Reston, Va.-based company has been balancing out its capital structure to prepare for the next industry challenges.
"Nextel is one of the biggest issuers in the high-yield market," Chief Financial Officer Paul Saleh told Dow Jones Newswires in a recent interview. "In 2002, we began a process of rectifying the balance sheet and trying to reduce the perceived financial risk."
At one point during the telecom meltdown, some of Nextel's bonds were trading around 50 to 60 cents on the dollar, for yields of 20% to 25%, according to data from HYmarket.com. Nowadays, none of its existing bonds trade below 100 cents on the dollar.
To be sure, times have changed. Wireless is no longer a dirty word, the economy has picked up and the credit cycle has turned. While the tailwind of the recovery certainly helped, Nextel also gets high marks for attacking both sides of the equation: boosting cash flow while sharply cutting debt and debt servicing costs.
As improving operating performance and cost cutting enabled the company to turn cash flow positive in 2002, Nextel started attacking its debt load and retired about $3.2 billion in debt and preferred obligations through a combination of cash repayments and debt-for-equity exchanges.
"The first thing is to get the operation to perform at a significantly higher level and to produce free cash flow," Saleh said. "As your financial profile improves, your access to the financial markets changes also."
In October, the company raised its full-year guidance, saying it now expects more than $1 billion free cash flow in 2003 - almost double the previous estimate of $600 million. At the end of the third quarter, Nextel had 12.3 million subscribers, not including customers from its Boost Mobile unit.
In 2003, Nextel, like many other companies, also got an added boost from a resurgence in the junk bond market - where it's a bellwether. Driven by a scarcity of yield elsewhere in the capital markets, junk bonds have enjoyed unprecedented demand this year. That helped to drive up the price of existing high-yield debt and pave the way for speculative companies to refinance bonds issued when rates were higher.
Of the $118 billion in dollar denominated debt issued so far this year, some $96 billion to $97 billion has been earmarked for refinancing, according to data from Credit Suisse First Boston.
Nextel played its part.
"When the tone of the market is very positive, you take advantage of it," Saleh said.
After not having issued a bond since 2001, the wireless provider tapped the high-yield market three times for a total of $2.5 billion in the span of about four months this year to repay more expensive debt.
It sold $1 billion 7.375% notes due 2015 in July, and then reopened that issue for another $1 billion in September. In October, Nextel sold $500 million 6.875% notes due 2013 - a low rate for a 10-year junk bond.
Through the whole process, Nextel has cut its annual interest and dividend payments to around $675 million from over $1.2 billion at one point in 2002. It also has cut debt by $5.7 billion to $10.7 billion.
And Saleh isn't done yet. Nextel plans to continue to improve its leverage profile, with an eye to eventually becoming investment grade.
In its latest effort, Nextel is refinancing some loans. The company is mum on details, but sources familiar with transaction say the company aims to slash the rate on up to $2.2 billion in syndicated loans. The transaction is expected to be wrapped up by year end.
Ratings Outlook Improves
"Nextel has really used every opportunity over the past year to improve its balance sheet and free cash flow. The company now has much better financial flexibility to deal with competition and a potential move to a new technology platform in the second half of this decade," Standard & Poor's credit analyst Michael Tsao said.
This summer, both S&P and Moody's Investors Service upgraded Nextel, and the ratings agencies recently have signaled the chance for further improvement.
In July, S&P raised its corporate credit rating on Nextel to double-B-minus from single-B-plus - citing improved financial leverage and a better competitive edge. At the end of October, S&P revised its rating outlook on Nextel to positive from stable - signaling that another upgrade could be in the offing.
The most significant new challenge to Nextel and its peers appears to be number portability - which went into effect Monday and allows wireless customers to keep their cell phone numbers even if they change providers.
S&P's Tsao believes that Nextel's proprietary network, head-start on push-to-talk services and entrenched subscriber base should keep the company relatively insulated against the threat of customer switchoffs through 2005.
Push-to-talk, or PTT, is a feature that adds a walkie-talkie function to cellphones. Other wireless operators have launched or are planning to launch PTT services, but their networks are incompatible with Nextel's. Tsao said that should keep its subscribers loyal since a move to the competition could potentially cut off PTT user groups.
The risk increases further into the future, given that some of Nextel's competitors, such as Verizon, Sprint and AT&T Wireless, are better capitalized and are working on PTT with major equipment vendors, Tsao said. He warned that in late 2005, Nextel's edge could begin to slip.
"The key to their future success is how well they stay entrenched in a number of sectors," Tsao said. "In the construction industry, for example, if all of your contractors use Nextel, it makes it more difficult for you to switch. They are well-positioned over the next two to three years. If they continue to execute well, their credit rating could very well be raised."
Also this summer, Moody's raised its rating of Nextel's senior unsecured debt to B2 from B3 to reflect Nextel's progress in repaying and refinancing debt as well its continued outperformance in terms of industry measures, such as average revenue per user, churn, or customer turnover, and subscriber growth. On Tuesday, Moody's raised its outlook on Nextel to positive from stable.
"Nextel has been competing for its entire life and doing quite well. New competitive challenges have arisen and we'd like to see some history of how the company responds to those challenges.," said Marcus Jones, a senior credit analyst at Moody's, citing new entrants to the PTT market and number portability.
Nonetheless, if Nextel can maintain "superior operating performance," in the face of changes in the marketplace, Nextel's ratings could rise, Moody's said.
-By Nicole Bullock, Dow Jones Newswires, 201 938 2039; nicole.bullock@dowjones.com
(END) Dow Jones Newswires
11-26-03 0732ET |
