A rally in the wireline telecom sector? Few players think it will happen in the short term. Last week's Chapter 11 filing by Winstar Communications was the latest blow to the sector and is seen by junk market players as the reason behind the sharp sell-off in wireline telecom bonds. Moreover, Winstar's burgeoning legal battle with Lucent Technologies is being seen as an indication of a deepening credit crunch in the beleaguered sector. Several sell-side analysts argue that Winstar and other wireline companies have grim operating prospects going forward given the intense cash needs of building continent wide or even global networks. They also note that investors are disenchanted with the sector as a whole as evidenced by the inability of Lucent and TeleCorp PCS to move $425 million in vendor financing debt (in spite of what many saw as an attractive 17% yield). A Lucent spokesperson says the company plans to re-offer the notes in the future, depending on market conditions (see story, page 4).
One high-yield analyst at a New York dealer, whose firm has underwritten several wireline deals, says the cash needs of building networks "have been wildly underestimated" by both corporate management and investors. He reasons that raising $1-2 billion via debt financing is not adequate for the task at hand, and that the result of the telecom financing "binge" of the last several years will be a variety of nearly bankrupt companies and half-completed networks. He continues that the paper of Global Crossing, and to a lesser extent, 360networks, should prove resilient, with both those companies having at least completed the network building phase and are focusing on broadening a customer base.
Telecom diehard Jerry Paul, portfolio manager at Invesco Funds, says he plans to participate in the Lucent-TeleCorp offering, but that given the proportional representation of telecom credits within his portfolio, he did not increase his exposure last week. He says he is still confident in "fully funded players" such as XO Communications and Level 3, but understands the hesitation of others. He acknowledges that for many of his peers, who have been burned mightily holding telecom paper, these credits are less than alluring. "You could say there's something cancerous about telecom paper these days," he adds, caustically. Paul does retain belief in the wireline sector, and he cites his willingness to participate in the pulled Lucent-Telecorp PCS deal as an example.
Lucent and Winstar were not the only players scraped. Traders in New York say high profile names such as 360networks started the week trading near $28, but had shrunk to $17 at press time. Williams Communications dropped to $43 from $58. Other names with wireline exposure, such as Level 3 Communications, and of course, Winstar (which fell from $3 to $1) took significant tumbles as well.
Analysts say Winstar's filing is just the latest chapter in what has been a woeful tale for high-yield telecom service providers. "It's a classic credit crunch," says Glenn Reynolds, ceo of CreditSights, an independent New York corporate bond research shop. The failure of companies like Winstar to prove their business models has prompted a severe erosion in debt and equity performance, leading the capital markets to shut off capital flows to the cash-flow negative sector, he adds. Even worse, Reynolds says telecom suppliers, the lenders of last resort (via extension of generous financing terms) are retrenching, given that they have their own sets of problems. In this sense, Reynolds argues that Lucent's recent withdrawal of $90 million in credit to Winstar, after Winstar failed to make a $75 million interest payment last week, is likely representative of the shape of things to come. He reasons that as companies like Nortel Networks and Cisco Systems are forced to realize losses due to their inability to collect, they will be forced into pulling more lines of credit as covenants are violated.