Moody's Investors Service has declared the U.S. wireless industry a higher credit risk and will engage in an intense industry review that may lead to revised ratings on several wireless companies. The rating agency's primary concerns include doubts on long-term subscriber growth, market saturation and increased competition.
Moody's suggests that growth estimates, currently based on Western Europe's penetration rates, will fall short of expectations and be insufficient to cover the capital expenditures made to support this growth. With carriers investing heavily to upgrade their networks, they need to get to the inflection point and start generating cash flow as soon as possible. Subscriber growth slowed significantly in the second half of 2001, and heightened competition among the six primary national competitors could lead to a situation where one carrier's gain is another's loss.
David Wells, a high-yield wireless services analyst atLehman Brothers, said there are two veiled positives in Moody's report. First, the first quarter subscriber results in 2002 were "fairly positive" for the wireless industry. Second, the outlook for wireless companies is not as bad as that of wireline companies, which including competitive local exchange carriers and long-distance companies.
When Sprint PCS affiliates announced that they would have 10-15% fewer subscribers for the year 2002, it set the negative tone for the entire industry. Wells said the problems that affected Sprint affiliates, especially AirGate PCS and Alamosa, had more to do with the companies' changing subscriber policies than an industry-wide trend. Moody's has placed the affiliates, including B2-rated Alamosa and B2-implied AirGate PCS, on review for a possible downgrade. But the rating agency also has revised its outlook for Baa2-rated AT&T Wireless to negative, as well as that of B3-ratedNextel Communications.
Although rural cellular companies are not exposed to the same level of competition as the larger national carriers, they are not outside subscriber growth fears. The companies also will have to embark on significant capital expenditure plans to keep their networks prime to absorb the profitable roaming minutes from larger carriers. In terms of current capital structures, many of them are looking at substantial amounts of bank debt and Moody's review will focus on how the carriers are able to allocate cash flow to debt service. Names currently being reviewed for a possible downgrade include B1-rated Western Wireless and Ba3-rated Rural Cellular. Ba3-rated Centennial Cellular already has been placed under review, and American Cellular was downgraded to Caa1 in May.
When it comes to wireless companies, investors must seek to evaluate how much of the current downward subscriber trend is influenced by long-term secular issues and how much is affected by economic and recessionary issues. "You cannot really say the slower subscriber growth is bad voodoo for the industry," Wells said, adding that the market will be looking at subscriber numbers for the next one to three quarters.