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:
- Qwest Communications International Inc. (NYSE: Q) -- $6.473 billion;
- Leap Wireless International Inc. (Nasdaq: LWIN) -- $1.615 billion;
- Charter Communications (Nasdaq: CHTR) -- $1.565 billion;
- Nextel Communications Inc. (Nasdaq: NXTL) -- $959 million; and
- Broadwing Inc. (NYSE: BRW) -- $802 million; and
- Allegiance Telecom Inc. (Nasdaq: ALGX) -- $783.9 million.
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