Amid widespread volatility in the investment-grade telecommunications sector over the last three weeks, analysts Doug Colandrea at Morgan Stanley and Ed Oppedisano ofDeutsche Bank have found common ground by recommendingSprint and AT&T bonds. Oppedisano is recommending the AT&T 7.3% notes of '11 (A3/BBB+), as they include a step-up coupon compensating investors in the event of ratings downgrades. He also says the company has done a good job reducing debt on its balance sheet, and will return to 180-185 basis points over Treasuries if the overall economy improves. The bonds were trading at 235 basis points over 10-year Treasuries last Tuesday. Colandrea says earlier issues by AT&T are also attractive, as language in the proxy statement gives bondholders a veto over the company's pending cable sale to Comcast. He says bondholders are likely to receive a cash payment from the company in exchange for giving the deal the okay.
Oppedisano is also recommending the Sprint 7.625% notes of '11 (Baa1/BBB+). The bonds were trading at 345 basis points over Treasuries last Tuesday, and he sees 50 basis points of potential tightening in the name. He says the long-distance carrier is one of the most technologically advanced in the industry and one of the best at attracting new subscribers. Colandrea also recommends Sprint paper, steering investors to longer maturities as technical pressure at the short end of the yield curve has increased volatility there. His best total return play, however, is WorldCom. He says the 7.5% notes of '11 (A3/BBB+), which traded at a spread of 335 basis points over Treasuries last Tuesday, will trade through Ford Motor Credit 7.25% notes of '11 (A3/BBB+), which were at a 290 spread on Tuesday. He believes the firm has taken steps to address investor concerns over company accounting, has a superior liquidity position to its peers, and its free cash generation will allow it to pay down debt.
Oppedisano says investors should expect continued pressure on other names in the sector, due to extreme pricing pressure in a weak economy that has forced companies to reduce capital expenditures by 25-30%. He sees further weakness ahead for Nortel 7.4% notes of '06 (Baa2/BBB-), which have traded as low as 74 and could return to that level from last Tuesday's price of 83. Oppedisano expects the company, beset by a trading scandal and the resignation of its cfo, will be downgraded to junk. Colandrea, who downgraded Qwest Communications from outperform to neutral on Jan. 30, sees continued near-term spread pressure on the credit due to liquidity-related concerns and investor fears possibility that the Securities and Exchange Commission investigation of Global Crossing could lead to a similar inquiry into Qwest. The Qwest 7.25% notes of '11 (Baa1/BBB+) traded at 280 basis points over Treasuries on Jan. 30 and were 440 over the curve last Wednesday.