Market research

Telecom Debt D-Day Coming Soon

Just when you thought light was breaking on the telecom horizon, Standard & Poor’s has cast another cloud over the market: More than $18 billion of outstanding telecom debt risks default by 2005, according to a report posted on its Website this morning.

There's about $306 billion in U.S. telecom and cable television debt outstanding, S&P's report says, of which $63 billion (about 21 percent) is set to come due by 2005. If a chunk of that goes unpaid, there could be a fresh round of high-profile bankruptcies.

While most of the debt is classed by S&P's as investment grade -- that is, backed by underlying financial liquidity that ensures it will get paid on time -- nearly a third of it is classed as speculative grade, or risky.

Carriers across the telecom spectrum -- RBOCs, cable TV providers, wireless carriers, satellite service providers, rural telcos, CLECs, and others -- are among the top carriers of more than $18 billion in speculative debt coming due from 2003 to 2005. Here's a sampling, with their debt amounts:

While all these companies are examples of "speculative debt," not all are rated equal by S&P's. Qwest, for instance, whose debt accounts for over a third of the speculative section, is rated B-/Developing. According to the firm's ratings system, a rating of B means Qwest's debt is "more vulnerable to adverse business, financial, and economic conditions but currently has the capacity to meet financial commitments." A minus sign denotes "relative standing" within the rating. The outlook of "Developing" means the rating could be raised or lowered, depending on how the carrier meets its challenges.

Of the companies cited above, Nextel has the highest rating -- B plus, with a Stable outlook. Leap Wireless has the lowest rating -- D for default.

Of course, whether this is old news or something truly new is a matter of debate. With some of the common stock in these companies trading for pennies, it's obvious that much of the risk of default is already priced into the market.

How likely any one of these carriers is to ultimately default is certainly open to question. Much depends on how the individual companies seek to remedy their indebtedness. Renegotiating terms with banks, selling assets, the purchase of debt, and the exchange of debt are all options that could result in better financials.

Though Qwest's recent move to go back to bondholders and force an exchange of debt struck many as a high stakes game of chicken, some investors think it may be the only way to survive (see Qwest Sheds Some Debt, Qwest Offers Debt Exchange, and Qwest Graded Up and Down). In fact, Qwest's moves may now serve as a model for companies struggling to avoid default.

"I think Qwest is a good bet on recovery," says Grange Johnson, a general partner at LaGrange Capital. "The bonds have moved up nicely. They have done a lot of things for improving their chances... but I can't say they'll definitely make it."

As far as other telecom debt is concerned, says Johnson, there is plenty of risk. "People have bought a lot of future here at these levels," referring to the stocks of some of the other telecom players with significant debt.

Debt exchange could become a fact of life in the speculative sector. "We expect to see more of these exchanges," says Catherine Cosentino, an analyst at Standard & Poor's, though she declines to say which firms are most likely to engage in exchanges or defaults, except to say, "The lower a company's ratings, the more at risk they are." She also anticipates a combination of debt exchanges and bankruptcies as the speculative-debt carriers face their individual reckonings.

She says S&P's views debt exchanges as equivalent to defaults, but the stigma may not hold. Qwest did a debt exchange transaction in December 2002, for instance, and S&P's promptly demoted its credit to D. Subsequently, though, Cosentino says the rating went up to B-, thanks to the impact of other issues, including the sale of Qwest's directory business.

Depressing stuff in many ways. Still, it may be worth noting that the telecom sector isn't the U.S.'s worst debt prospect by S&P's lights. In a report earlier this month, the ratings firm indicated that telecom has more "developing" news that could sway the sector's credit quality outlook. In contrast, the automotive, capital goods, and chemical/packaging/environmental services industries have unremittingly negative outlooks.

— Mary Jander, Senior Editor, and R. Scott Raynovich, US Editor, Light Reading

whyiswhy 12/5/2012 | 12:11:48 AM
re: Telecom Debt D-Day Coming Soon All those other sectors underpin the economy to a much greater extent than Telecom. The story here is more bad is coming our way, with no real estate building to offset it. Autos are 40% of our economy, as if they are off, well I warrant most everything else is too.

Shocked nobody else has posted...

lightbeer 12/5/2012 | 12:11:40 AM
re: Telecom Debt D-Day Coming Soon This is nothing new to report. I am continually amazed that more companies have not gone chapter 7 and liquidated. There are clearly too many service providers and vendors chasing too little market. I am all for the capitalist life cycle of innovation, growth, and consolidation. But there are way too many companies out there on life support that should be allowed to die a respectful death. Only after the herd is culled will the rest of the industry return to some much needed stability.

I am also dumb founded on the number of stupid VCs throwing good money after bad. Wasn't any of these MBA morons present during the day sunk costs were taught? These guys would be better off going out to Vegas, where if (big if)they were smart enough to play black jack they would at least have some respectful odds to make some money for there partners.

Keep drinkin,

whyiswhy 12/5/2012 | 12:11:31 AM
re: Telecom Debt D-Day Coming Soon OK, but I would only observe that in many cases the investors in public companies are in worse positions than VCs in start-ups. In many cases, bigger public companies have burn rates that can only be sustained for short periods. I expect announcement from GLW in June, followed by something from BKHM in Q3-Q4.

Ironic, it's the prospect of business failure which is motivating both class of investors to lay their money down. Or should I say, lay our money down while charging us mamagement fees? Crazy.

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