Qwest Tidies Up Finances
In an economic climate where capital spending has become a barometer of a carrier's overall health (and the health of its suppliers), analysts say the move is a telling one. And it throws into focus the approaches big carriers are using to raise much-needed funds for network buildouts this year.
Here are the details: Qwest sold $3.25 billion worth of its own debt in the form of Senior Notes issued and guaranteed by the carrier itself. The lead initial purchasers of the notes were Banc of America Securities LLC and J.P. Morgan & Co. (Nasdaq: JPM).
The deal helped Qwest take advantage of lower interest rates to help pay off some debt in order to fund capital expenditures. However, Qwest won't specify just how much the debt sale is actually going to contribute to its capex budget, which it estimates will be about $9 billion this year (the same as last year).
Analysts say Qwest is among a select group of established carriers that can hope to raise money this way. Another is McLeodUSA (Nasdaq: MCLD), which also recently succeeded in raising $1.5 billion cash through sale of Senior Notes.
A key financial strength for both Qwest and McLeodUSA, analysts say, is high EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) -- a generally accepted measure of liquidity.
And liquidity's a feature that makes Qwest attractive to most financial entities, such as banks and institutional investors. "Qwest's balance sheet gives them a much more attractive credit profile than some other carriers," says Cary Robinson, senior analyst at U.S. Bancorp Piper Jaffray.
In Qwest's case, EBITDA was $1.99 billion last quarter, helping give the company a strong lever for debt financing. McLeodUSA showed positive EBITDA of $60.8 million for the year 2000, as reported in January.
What's contributing to Qwest's EBITDA? Robinson says it's a far-reaching infrastructure that's already making money. In part, that's coming from voice services won in Qwest's acquisition of US West, completed in 2000. "An awful lot of cash can come from voice services," Robinson says.
In contrast, carriers still struggling with buildouts or relying heavily on revenue from long-distance services are showing lower EBITDA and may need to explore other options than debt financing to raise money.
Williams Communications Group (NYSE: WCG), for example, has forecast EBITDA for the first quarter of fiscal 2001 to be a loss of $70 million -- even though it had EBITDA of $64.3 million at the end of the fourth quarter 2000. The company focused last year on building out the long-haul portion of its network. This year is the one in which it hopes to add local access and metro capabilities that are more immediate revenue-generators.
In the meantime, though, the economy is making it tougher for companies like Williams to raise cash through debt sales that depend on high EBITDA. As a result, Williams must look to other ways of raising sufficient cash to meet a capex budget of about $1.9 billion in a timely fashion. Among other options, the carrier is looking into extending bank credit, a private debt sale via structured notes, and private equity sold to customers.
These measures should unfold over the next couple of years, Williams says. But in the near term, Williams' inability to raise cash has put it in a tough position. Simply put, it can't build more infrastructure until it starts getting revenues from what it's already got.
This situation has forced Williams to take a measure that could affect its suppliers: namely, the carrier won't pay for equipment until it's actually using it. According to a research note issued last week by Salomon Smith Barney: "[Williams intends] to only pay for some equipment from vendors when their business dictates its use, regardless of when it's received. This means that some cash outlays are likely to be pushed into the 2002 timeframe." If this happens, it could slow up sales for Sycamore Networks Inc. (Nasdaq: SCMR), which SSB says gets 50 percent of its revenue from Williams.
SSB also says Williams reduced its overall plans for capex spending by $400 million this year in a further effort to meet its numbers.
Problems like these, highlighted by this week's debt sale by Qwest, are sure to continue as carriers struggle to raise cash this year. Meanwhile, other carriers are exploring their fundraising options. One is a shelf registration, in which the carrier sells a combination of debt and equity to raise cash -- an approach favored by XO Communications Inc. (Nasdaq: XOXO), which plans to raise $2 billion this way. XO, incidentally, showed an EBIDTA loss of $88.7 million for the fourth quarter of 2000.
-- Mary Jander, senior editor, Light Reading http://www.lightreading.com