Group Telecom Takes a Hit
Large carriers continue to be plagued by fallout from vendor financing deals.
Canadian carrier Group Telecom (GT) is the latest independent North American carrier in danger of defaulting on bank loans. And it says that's because two of its key suppliers, Cisco Systems Inc. (Nasdaq: CSCO) and Lucent Technologies Inc. (NYSE: LU), have cut off funding.
This week, GT said the two equipment providers recently yanked vendor financing totaling US$156 million from the carrier's reach, cutting its available cash nearly in half (see GT Loses Vendor Financing). The effect, analysts say, will be to stifle the revenue growth GT needs to pay its debts.
The news highlights the ongoing consolidation in the telecom sector, as suppliers, strapped for cash themselves, pull key funds from hungry alternative carriers in an effort to avoid risk.
"It's a typical CLEC story," says one Canadian equity researcher, who asked not to be named. "Vendor financing doesn't tie just to equipment. GT is well-positioned, but the market's down as it is. And if you don't have half the cash you did before, it has an impact."
Having acknowledged this impact on its financials, GT seems reluctant to admit that this may hinder its ability to carry on its day-to-day work. The carrier's homepage link launches an automatic letter to customers saying the lack of further help from Cisco and Lucent shouldn't affect GT's service quality.
That's damage control, sources say. "Their network's not complete," says the Canadian researcher. And the lack of funding pulls the plug on GT's plans to finish it, at least for the moment.
One of the projects that may be affected is the network proposed by Canarie Inc., a not-for-profit corporation charged with creating and overseeing the network that links Canada's universities and research centers. GT won an RFP last month to use Cisco and Lucent gear to equip the next iteration of the network (see Canada Bankrolls Provisioning Project).
Despite the setback, GT says it's got enough cash (about US$144 million) to "fund operations while it continues discussions with its secured lenders." But if those discussions fail, it "will have to consider all of its alternatives" when the loan payments come due June 30.
GT's relationships with both Cisco and Lucent were long-standing. Back in September 1998, it announced its first agreement with Lucent, which totaled about CA$315 million (US$207 million, in today's dollars) and included funds for GT's initial buildout in Calgary, Vancouver, and Toronto. GT said in November 2000 that it had closed a financing deal with Cisco worth CA$120 million (US$79 million).
It's not clear how these arrangements changed over time, nor exactly what triggered their severance, which took place after March 31, 2002, when GT happily disclosed the available cash from the agreements as part of its earnings report.
In some ways, Cisco's abandonment of GT is more surprising than Lucent's. After all, Cisco backs other startup carriers, such as Cogent Communications Inc., which as yet have shown paltry returns (see Cogent Conundrum Continues).
But like other suppliers, Cisco and Lucent continue to cut financing. Lucent's reduced its lending budget by over half since the end of 2001, going from US$5.3 billion in December to US$2.2 billion in the latest quarter. Cisco continues to cut financing, although more incrementally: Over the past two quarters, it's shaved US$400 million off the budget to reach a total of US$1.3 billion.
Neither Lucent nor Cisco had comments on the situation at GT, and GT's PR contact said a spokesperson wasn't available at press time.
— Mary Jander, Senior Editor, Light Reading