Investors See More Risks in Satellite Networks: Rates of Return
New York, April 14 (Bloomberg) -- Investors who poured $4 billion into bonds of satellite-based telephone companies, such as Iridium LLC, worry those companies' growth will be thwarted by competition from land-based phone systems which charge less.
Iridium, and its competitors Globalstar Telecommunications Ltd. and ICO Global Communications Ltd., grabbed headlines with their vision of phones that work anywhere in the world. Using fleets of new satellites, they promised to eliminate the dead zones that plague cellular phone systems.
Problems with rocket launches and slower sales than expected have cast doubts on the future of satellite networks, causing their bonds to fall as investors grew more fearful of default. Iridium's 14 percent bonds due in 2005 are down 41 percent since their sale two years ago and now bid at about $560 each to yield 30 percent. Globalstar's 11 1/2 bonds due 2005 tumbled about $300 per $1,000 since they sold 11 months ago, and are bid at 69 3/4 to yield more than 20 percent. ''Satellite is an interesting story but for every day that goes by and they're not up and running, they risk other cellular technology beating them to it,'' said Dean Kartsonas, who help manage $5 billion of bonds at Federated Investors.
Washington D.C.-based Iridium, 19.5 percent owned by Motorola Inc., started operations for some customers late last year, though the company says its growth was stymied by shortages of telephones and sales staff. New York-based Globalstar expects its system will be running by September and ICO, of London, is scheduled to begin operating in August 2000.
Satellite-related accidents the past year added to investors' skittishness. Globalstar, which is backed by Loral Space & Communications Ltd., lost 12 satellites when a rocket carrying them crashed in Kazakhstan last September, causing its bonds to drop almost 20 percent in a single day. Earlier last year Iridium's satellite deployment was delayed by two separate launching mishaps.
Lots of Competition
Apart from competing with each other, the satellite companies must cope with lower prices at cell phone systems linked by GSM, the global system for mobile telecommunications standard. GSM, which uses satellites in higher orbits than those of the newer networks, is in 118 countries and used by more than 150 cellular phone companies. Coverage gaps among those companies are shrinking as they expand.
Iridium's phone costs almost $3,000, with charges of $1 to $8 per minute. Even if its prices fall to Globalstar's $800 to $1,100 for handsets and 65 cents to $1.50 a minute for calls, it will be more expensive than existing cellular networks. Omnipoint Corp., for example, charges $199 for a handset that works on cellular networks around the world.
If the satellite systems falter before they meet their growth objectives and earn a profit, it wouldn't be the first time a part of the fast-growing telecommunications business was laid low by competing technology.
Paging Companies
Paging companies, led by Paging Network Inc. and Metrocall Inc., boomed earlier in the 1990s as a cheaper, lightweight and easy-to-use alternative to cell phones. Paging revenue at many companies stopped growing the past year, and leaders in that business were tarnished by plunging prices and explosive growth of cell phones.
Shares in Paging Network, the world's No. 1 paging business, tumbled almost 70 percent the past year to 4 3/8. Its 10 1/8 percent bonds due 2007 dropped 20 percent to be bid about 85 cents on the dollar in the same period, traders said. ''There's a danger in any of these businesses that depend on technology, that the technology will become obsolete,'' said Bob Kricheff, a managing director in high yield at Credit Suisse First Boston. ''Paging definitely suffered from technological obsolescence.''
Four years after satellite telephones piqued investor interest and began selling bonds, ''it's still very speculative,'' said Charles Ullerich, who helps manage $1.1 billion of high-yield bonds at Pilgrim America Group in Phoenix. He said he's holding onto his satellite bonds and ''just watching this race'' between the operators, unlike many investors who bailed out as bad news mounted.
Waiting for Proof
Michael Snyder, a money manger at DLJ Asset Management in New York, won't touch the bonds until the companies have some performance history to go by. ''I'd want to see some indication of success before getting involved,'' said Snyder, who manages $650 million of high-yield bonds. ''If things don't work out, there isn't going to be a lot of asset value in the satellites.''
As the first of the satellite companies to begin operating, Iridium is the first to test demand for the new phone service. So far, its experience is disappointing enough for its stock to fall 68 percent the past year. At yesterday's close of 19 its stock is slightly below the 20 price set at its initial public stock sale in mid-1997.
The company said last week it won't meet its year-end goal of break-even cash flow, for which it needs 500,000 subscribers or 167 times the 3,000 it had at the end of 1998. The company says its primary customers will be businesses with workers in remote areas, such as shippers or oil and gas explorers.
Iridium's Bank Lines
Last month, Iridium's chief financial officer Roy Grant quit, and the company's banks gave it 60 days to meet sales targets or risk defaulting on its $800 million credit line. The company said in filings with the Securities and Exchange Commission it needs about $1.65 billion of cash this year.
With bond yields of 20 percent and higher, investors are judging satellite phone companies to be far more risky than when they sold the bonds a few years ago. Still, the bonds' yields are not so high as they would be if investors thought default was imminent. ''It's been a roller-coaster ride for the bonds and investors are discouraged,'' said Jane Haugh, telecommunications analyst at KDP Investment Advisors in Montpelier, Vermont. ''But I have to think most of the bad news is behind us.''
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