Investors looking for reason to punish telecom-related stocks have been given plenty to chew on lately. Even bellwether stocks such as Cisco Systems Inc. (Nasdaq: CSCO) are guilty by association when their customer relationships are held up to scrutiny.

Indeed, one doesn’t have to spend long sifting through SEC filings to get the mistaken impression that Cisco is running a charity for financially-challenged carriers.

Consider, for example, Nucentrix Broadband Networks (Nasdaq: NCNX), a wireless cable TV service provider that serves small markets in middle America. Nucentrix has a deal with Cisco where it’s required to buy at least $13 million worth of base station and customer premises equipment from Cisco through the end of next year.

Cisco has committed up to $16.25 million in financing for Nucentrix's network. Nucentrix hasn't drawn down on any of this yet, but Cisco's involvement here illustrates how aggressively it's going after up-and-coming markets, using financing to establish a beachhead. Meanwhile, much of Nucentrix's story is still waiting to be written. It's in the midst of repositioning itself as a wireless Internet company and its revenues for the nine months ending Sept. 30 fell 12 percent to $46.8 million. It will be interesting to see how big a bet Cisco makes here and how quickly Nucentrix can grow in a nascent market.

Another Cisco-assisted carrier that could be worrisome is Advanced Radio Telecom Corp. (Nasdaq: ARTT), a wireless broadband provider whose stock is trading around $2 a share. Cisco has committed between $14 million and, pending certain conditions, up to $175 million to this firm. Meanwhile, Advanced Radio Telecom has its own financing problems — it’s waiting to collect on a $13 million unpaid loan from BroadStream Communications, a streaming media firm.

And consider Pacific Gateway Exchange (Nasdaq: PGEX), a wholesale long-distance company. It got a $15 million financing commitment from Cisco one year ago this month. Since then, Pacific Gateway Exchange had $2.7 million outstanding under that facility, and a recent bank default caused the firm to default on the arrangement. Meanwhile, Wall Street analysts are downgrading the stock en masse. Shares of Pacific Gateway are now trading around $1 and the stock is in danger of being delisted from the Nasdaq stock exchange.

ICG Communications Inc. (Nasdaq/Neuer Markt: ICGX) is another carrier on which Cisco bet (and lost) big. As of June 30, ICG had drawn $99.1 million of a $180 million commitment it had from Cisco. But last month, when it found it couldn't wring revenue out of its network fast enough to pay back its debts, ICG filed for Chapter 11 bankruptcy protection (see ICG's Dark Cloud).

Pan-European carrier Viatel Inc. (Nasdaq: VYTL) secured a $50 million lease from Cisco as late as October 27, when similar carrier stocks were just starting to hit their 52-week lows. Analysts were taken aback by Cisco's generosity, especially considering that, as noted in a recent Wall Street Journal article, Viatel has about $2.1 billion in outstanding debt, and its high-yield bonds are trading at 35 cents on the dollar.

But Cisco's not afraid to finance equipment for troubled companies in troubled markets -- just ask Rhythms Netconnections (Nasdaq: RTHM). Rhythms, the DSL provider, secured a $50 million commitment from Cisco the very day it defaulted on a $5.1 million payment from another security. It turned out that Rhythms has the cash to stay in business for a while, but the commitment from Cisco demonstrated that even a financial stuffed-shirt won't say no to a troubled customer in need (see Rhythms' Plight May Trouble Cisco).

What’s most interesting about all this is that Cisco fancies itself well insulated from possible carnage in the carrier market. In fact, only about one-third of Cisco’s financing resources are used for structured loans and service provider accounts that are a business or credit risk, according to the company.

And of the $2.4 billion that Cisco has committed to such loans, only about $600 million has actually been drawn down. Cisco also says it has deferred or reserved about 65 percent of that $600 million. In plainer terms, Cisco feels it’s put aside enough cash to cover its hide, should there be any surprises involving its riskier financing deals.

All in all, Cisco continues to be a shrewd lender, and it conservatively accounts for revenues that come from its vendor financing activities (see Vendor Financing). But, like everyone else expecting a service provider shakeout, even a lender as conservative as Cisco will occasionally get ripped for the sake of the company it keeps, be that in the form of bad loans or other financing.

Cisco was contacted for this report but wouldn’t comment on specific customer financing arrangements. Indeed, its mantra hangs on CFO Larry Carter’s words during Cisco’s first fiscal quarter conference call: “While it is always possible we could encounter a surprise, we believe we are conservative and have mitigated our risks."

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com