Leap Wireless' vendor-financing paper made increasingly giant strides last week and market players are working to gauge the potential value in the company's equity. Leap's vendor-financing paper traded in the 115 context at the start of last week, up from the 108-109 context where it was trading a month ago. By the end of last week the wireless communications company's paper was said to be trading in the 120-124 range. Some traders are predicting the debt could even climb another 20 points to reach 140.
"The company's basic fundamental metrics were very strong in the first quarter. That leads people to have a more optimistic outlook about the business," noted William Freeman, Leap's newly appointed ceo. Freeman said the key to Leap's recovery has been a combination of both revenue generating and cost reduction actions. "We drove up our top line revenue [while] managing our costs down." He noted that Leap's improvements are not a company-specific phenomenon, but the whole market atmosphere seems to be favorable for other wireless providers.
An initial public offering for MetroPCS Communications that was filed two weeks ago has played a big role in making Leap a hot name. One analyst said MetroPCS' valuation could be $2.05 billion or 11.4 times EBITDA for 2004. Since Leap and MetroPCS are wireless communications providers with similar strategies and EBITDA growth, market participants believe a valuation of $2.7 billion with nine times EBITDA for Leap is reasonable. Investors in Leap's paper, who have about $1.6 billion in outstanding claims, are slated to receive 96 1/2% of the equity in the reorganized company and about $350 million in new debt when the company emerges from bankruptcy.
Leap's bankruptcy exit is now subject to the Federal Communications Commission (FCC) controls and is expected to occur in a matter of days or months. "The longer [the FCC decision] takes, the longer people speculate on the equity going up and giving more value to the loan," a trader noted. Leap's paper has been trading at increasingly higher levels since the debt moved above par in April.
A year-and-a-half ago the company's vendor claims were changing hands in the 17-18 range. Ericsson, Nortel Networks, Qualcomm and Lucent Technologies, Leap's original debt holders sold the paper to distressed investors.