PERSONAL FINANCE Junk-Rated Telecom Debt Worries Many Investors
May 04, 2011
NEW YORK -- Junk-rated telecommunications companies have been struggling to put together attractive debt issues in an increasingly crowded market. But many investors say the efforts may be in vain. ``We've been reasonably aggressive in the telecom industry to date,'' said Markita Hamman, portfolio manager for Federated Investors' high-yield funds. ``But some of the recent deals have been too risky for us.'' Several junk-rated companies have increased yields and added equity warrants in an effort to sweeten their offerings during the current lull in buyer demand. For instance, Wireless One Inc., a Baton Rouge, La., owner and operator of wireless cable television systems, added a 3% equity warrant to its $125 million debt offering that was priced late Tuesday. The issue has since been trading around the new issue price, but traders said it is under some downward pressure. Other companies have decided to hold issues back rather than face tepid demand. Advanced Radio Telecom Corp. and Winstar Communications Inc. both shelved planned debt and equity offerings last week, citing poor market conditions in the telecom sector. And Thursday, PCS Development Corp. decided to delay a $165 million debt offering, blaming poor market conditions and too much supply. The postponement came after talk that the voice messaging service provider had already restructured the deal to increase the yield to 14.5%, up from 13.5%, and to include warrants representing 15% of the company's equity, up from 5%. There are also signs that investors are becoming increasingly wary of buying ``concept'' companies -- those that have crafted a business plan but haven't yet established significant cash flow, analysts said. ``Concept bonds are going to have problems,'' said Lesli Lexie, a managing director at Merrill Lynch & Co. ``if they are telecom, or anything else for that matter.'' Indeed, Advanced Radio Telecom blamed the markets' lack of interest in companies with strong potential but scarcely any reported earnings when it pulled its debt and equity offerings last week. But telecommuncations companies sitting out this rough period should take heart: Several portfolio managers who buy telecom debt say startups are probably better off delaying than over-sweetening their deals. ``Companies are using the high-yield market as a substitute for venture capital,'' said Anette Ladawn, a media and communications high-yield analyst for Cititcorp Securities Inc.. Mr. Ladawn added that many market players see the equity warrants some companies are offering as meager compensation for the ``tremendous downside'' should one of these low-rated companies default. What's more, with so much supply already out there, some portfolio managers say they prefer to wait until new issues start trading in the secondary market before deciding whether to buy in. ``The optimal time is not necessarily the offering date,'' said Hassan Manson, portfolio manager of the Kemper High Yield Fund. ``What's wrong with owning (debt) after seeing if it has a taste of success?'' Even efforts to lure investors by restructuing zero-coupon deals to include a coupon rate after a four or five-year period -- or to scrap the zero coupon structure entirely -- don't impress Guffey's Mr. Manson. ``At the end of the day it's a wash,'' he said. ``Companies have to sell more debt in order to make the cash payments.'' Inter-Act Systems, a Norwalk, Connecticut, telecom company, pursued such a strategy, delaying its 10-year debt offering before opting to add a coupon payment following the fourth year. Since its issuance, the company's debt hasn't traded much, and the price is about unchanged, traders said. Other investors say they are simply waiting for the two major issuers still firmly slated on the forward calendar: Sprint Spectrum LP and NextWave Telecom. Consequently, they have only dabbled in smaller companies or, in some cases, simply avoided them. Sprint Spectrum, a joint venture between Sprint Corp., Tele-Communications Inc., Comcast Corp. and Cox Communications Inc., is expected to price $650 million in debt next week. NextWave Telecom, a San-Diego, California-based personal communications services company, is also expected to attract investors with its $400 million debt offering of 10-year senior discount notes. Early talk is for a pricing in September.
