Between $300-400 million of Leap Wireless International vendor-financing paper has traded over the last two weeks at heavily discounted levels as companies such as Ericsson, Nortel Networks, Qualcomm and Lucent Technologies look to escape exposure to the distressed name. Specialized hedge funds are said to be the buyers of the paper, with distressed-debt specialist The Seaport Group brokering the paper. "The vendors are not set up to think about the world this way," said a trader. "The distressed investors are playing on what they think the value in a reorganization will be," he added. Officials at Seaport declined comment.
The trades are said to have gone off in the high teens between 17/18, with some large boxes of up to $150 million being bought. Some major selling came in September after Leap's August announcement that UBS Warburg had been retained to explore new sources of financing and restructuring for its debt, said a banker. The vendors are now taking internal business decisions to get out of it, another added. Leap has net debt of almost $2 billion with $1.46 billion of that in vendor-related financing.
Ericsson admitted after the restructuring announcement it has $119 million of drawn exposure to Leap and undrawn commitments of $368 million. A spokesman for Ericsson did not return calls. A spokesman for Lucent declined to comment specifically on Leap, but he said, "We expect to keep [vendor financing] exposure levels significantly lower than seen in the past." Vendor financing has gone from $5.3 billion to $1.3 billion this past year for Lucent. Officials at Leap declined to comment on specific vendor-financing arrangements, but said UBS is still working on restructuring proposals.
Vendor financing provided telecom start-ups and dot-coms without earnings or credit histories significant credit to buy equipment from the companies making the loans. "They gave them equipment and they got paper," one banker said. "But when the bubble burst, the value of the equipment plummeted." The paper has maturities' of 07/08, but the spreads could not be ascertained. "The vendors are getting out of it [financing]," said the trader. "The market is watching a movement from the vendors to distressed investors." Blocks of the paper have moved in the past, but this is much greater than before, he said. Goldman Sachs has historically traded the paper, but is not behind these trades, said another banker.