WilTel Communications Gains From SBC Relationship

WilTel Communications' strong relationship with SBC Communications, moderate leverage after a 2002 restructuring and good liquidity, all support the B3 rating Moody's Investors Service has assigned to WilTel's proposed credit facility. Credit Suisse First Boston is leading the bank deal for the Tulsa, Okla.-based long-distance carrier, which consists of a six-year, $360 million term loan "B" and a five-year, $25 million revolver. Price talk on the "B" loan is LIBOR plus 3 1/2-3/4%. The revolver is priced at LIBOR plus 3 1/4%, with a 50 basis points committment fee.

WilTel's preferred provider relationship with SBC, one of the biggest telecoms companies in the U.S., is the major driver for the rating, said James Veneau, v.p. senior analyst at Moody's. About 50% of WilTel's revenues derive from SBC. "This is a substantial source of strength," he noted. WilTel has a right of first refusal with SBC, in the event SBC would be trying to expand its long distance business, it could not give the business to another company without letting WilTel bid first, he explained.

But WilTel's main challenge is to grow its operating margins, Veneau noted. Margins are thin due to industry overcapacity, low pricing levels and only limited cost reduction possibilities, he explained. These circumstances do not leave much cash available to re-invest in the business, he noted. "Generating free cash flow will take a very disciplined [approach to] capital expenditures and cost structure as well as growing market share," he said.

While Chapter 11 allowed WilTel to restructure its balance sheet and lower its debt from $5.9 billion to $573 million, many of the market challenges that led the company to seek bankruptcy protection remain, Veneau said. These challenges are mainly the market's weak demand for telecom services and the highly competitive industry in which WilTel operates. "The business environment has not changed substantially. The company's balance sheet has changed," Veneau noted.

WilTel is a subsidiary of Wiltel Communications Group and was formerly called Williams Communications until filing for bankruptcy protection in 2002. A WilTel spokeswoman declined comment.