Wireless credits are turning on a strong finishing kick of a comeback that started 18 months ago and has seen some names rise close to 50 points. Improving fundamentals, a gradual change in market sentiment and the prospect of industry consolidation has elevated a sector that was severely beaten down toward the latter half of 2002. The bank debt for regional wireless carriers such as Western Wireless Corp. and Rural Cellular Corp. now trades around 101, and even the Sprint PCS Group affiliates are getting into the action. UbiquiTel is now quoted in the 95-97 range, up from the mid-to-low 50s in the fall of 2002, according to Mark It/LoanX. And Alamosa Holdings plans to soon permanently repay its now near par loan.
Consolidation in the wireless industry, a topic that has been resurrected as AT&T Wireless Services reviews merger options, is driving some of the speculative value of these credits. "Ultimately, these rural guys are just going to get rolled in," said one dealer. "Once a major acquisition takes place, it sets off a whole domino effect." Consolidation means less competition and more rational market behavior--all good things. But there is more to the comeback of wireless, market players said. "The run [wireless companies] had in 2003 was not motivated by consolidation," noted David Wells, a managing director with David L. Babson & Company.
The biggest factor is that the companies are in better shape. "There are more carriers running companies for profit," Wells said. "The quality is there. The coverage is there. The industry is fundamentally different than the CLEC industry." Those differences are being picked up in a market where "wireless" was a dirty word. When the credit markets turned, few industries suffered more from market sentiment than telecom and anything related to it, one source noted.
There was reason for such negativity. The growth in subscribers also began to slow as the economy weakened. "People read into that [thinking] that the ultimate use of wireless was not going to be as high as people thought," said Wells. Moreover, the level of churn at these companies was also a lot higher than investors expected, he added. Investors took those factors as a sign that the industry would have to restructure.
But a large-scale industry restructure never came. Now, not only have the credit markets come back, but the sentiment toward telecom has changed, too. "Here we are in 2004 and you have absolute growth," Wells said.
There were some casualties along the road to recovery for wireless names. Sprint-affiliate iPCS ultimately filed for bankruptcy, as did Leap Wireless. Wireless companies also completed some debt reconfiguring. Western Wireless and Centennial Communications Corp., for example both used the proceeds from high-yield offerings to reduce the outstanding amounts under their credit facilities.