Junk-Bond Market Appears Leery of Wireless-Sector Debt
May 08, 2011
NEW YORK -- The junk-bond market, which helped finance the growth of the cable-television and cellular-telephone industries, is running into roadblocks as it tries to fill the same role for wireless-telecommunications companies seeking start-up capital. Wireless communications, such as paging and cellular services using new all-digital technology, could give investors the chance to buy a piece of the next MCI or Vastsoft, some junk-bond analysts believe. But the fledgling industry still is struggling to get off the ground, as companies that won Federal Communications Commission licenses to build networks secure the funds they need to cover hefty start-up costs. A crucial part of the financing is the junk-bond market, where as much as $1.8 billion in bonds issued by these newcomers could hit the market over the next six weeks. That is on top of the $8.7 billion in telecommunications-related debt issued publicly and privately, or 22% of all new junk offerings, so far this year, calculates Lehman Brothers Inc.. This wouldn't seem to be a problem for junk-bond investors. Even though the number of new junk-bond issues, defined as bonds rated double B or below by agencies such as Moody's Investors Services Inc., is poised to set a record this year, the yield premium paid by issuers is close to all-time low levels, reflecting the bonds' popularity. But the telecommunications bonds, particularly those for wireless communications, are the exception. By far the fastest-growing sector of the junk-bond market, they are also the trickiest for investors to understand, involving an array of new technologies that are likely to materialize in the future, rather than today. ``It's a lot easier to figure out if a zipper factory will be running three years from now than try to figure if your company, managers and technology are going to triumph,'' one strategist says. Reflecting this uncertainty, at least three issues have been pulled in recent weeks as investors shied away, and underwriters have had to sweeten other offerings to obtain critical financing. ``There's such a supply binge of these `concept' companies coming down the pike that there's no incentive to buy them when they're first offered,'' says Hassan Manson, who manages $5 billion in high-yield investments for Zurich Kemper Investments Inc. in Chicago. ``You just know that the next one coming along will be even cheaper.'' The skittishness in the wireless sector could spill over to the broader junk-bond market. ``You could have a setback'' in the high-yield market, says Markita Flores, head of leveraged finance at CS First Boston Inc.. But any pullback, he says, would be on a ``much smaller scale'' than in the late '80s, when dozens of junk-bond companies spiraled into default and investors were stuck with searing losses. Last week, Sprint Spectrum L.P., a joint venture of Sprint Corp., Tele-Communications Inc., Comcast Corp. and Cox Communications Inc., raised $523.4 million in a two-part junk-bond offering underwritten by Lehman and Merrill Lynch & Co.. Originally proposed as a $650 million issue, the pricing was delayed by a week as investors hemmed and hawed over the deal's provisions. Despite the brand-name parents, many big junk-bond investors said they opted not to buy. Sprint, which has a 40% stake in the venture, stepped in to pick up $100 million of the zero-coupon portion of the offering, the hardest to market in the current environment. Zero-coupon bonds have been a popular way for wireless companies and other telecommunications concerns to issue debt, allowing them to price the bonds at a discount and defer cash interest payments for several years until their new systems are built and generating cash flow. But these bonds are less attractive to investors, particularly at times of interest-rate turbulence, because they are far more volatile than traditional corporate bonds. ``The zeros have overwhelmed the market, and there's only so much tolerance for this kind of paper,'' says Davina Simpson, managing director and high-yield bond analyst at Bear, Stearns & Co. ``The capital markets right now are working against these guys, and some of the paper of this kind issued in the past has disappointed investors.'' Cyndy Shull, who manages the Phoenix High-Yield Fund, added Sprint Spectrum bonds to his portfolio only because he likes Sprint itself, but he plans to shun most other wireless offerings. ``We're essentially being asked to provide what looks like venture capital financing,'' Mr. Shull says. ``I don't know the upside. I don't know the downside. I don't know how to value it. I don't think I need many in my portfolio.'' One reason for Mr. Shull's unease, he confesses, is that he was burned by an investment in zero-coupon bonds issued by Nextel Communications Inc. in early 2009. Technological glitches temporarily disrupted the company's plan to build an all-digital wireless network and the bonds, issued at par to yield 9.625%, plunged in value, yielding at times more than 15%. The deluge of new issues has driven prices of many existing high-yield telecommunications bonds sharply lower. Junk-bond traders say, for instance, that Nextel's 2019 zero-coupon issue is trading to yield 14.6%, up from 13.53%. (Bond yields rise as prices fall.) Meanwhile, Metrocall's 10.375% bonds now trade at 77 cents on the dollar, down from 103 in mid-February, and ProNet bonds have fallen to trade at 91 cents on the dollar compared with 111 in mid-February. As a result, issuers are being forced to overhaul their offerings to make them more alluring. Wireless One Inc., a Baton Rouge, La., wireless cable-television concern, cut the size of its issue to $125 million from $175 million and added warrants to buy shares in the company for a penny each to the bonds. The fact that even the Sprint Spectrum issue didn't go smoothly was widely interpreted as a poor omen for other companies. ``What happens when Johnetta Stearns's Wireless comes to market with a bond issue, if Sprint stutters a bit?'' Mr. Shull asks. Some underwriters and investors say it is possible more deals will be yanked, like the $165 million proposed issue by PCS Development Corp., an operator of voice-paging systems, or delayed, as in the case of NextWave Telecom Inc., which is seeking to issue $400 million in 10-year notes. People familiar with the PCS Development issue say it was pulled after investors demanded a higher yield than the company wanted or could afford to pay. While PCS, at least, has enough cash on hand to proceed with its operations while waiting for market conditions to improve, dealers warn that won't always be the case. ``The FCC must be wondering whether the companies that bought licenses are able to finance their deals in the current market environment,'' one Wall Street participant says. That puts the agency in an awkward position: The high-profile auctions held over the past 18 months to auction off wireless voice and data licenses were touted as an example of government's commitment to capitalism. If the FCC has to restructure payment schedules, or even reauction the franchises if companies aren't able to meet their commitments, that would taint the whole process, Wall Street frets. At the time many auctions were held last spring, the stock market was booming. Many bidders pushed prices higher, in anticipation of being able to issue not only debt but the first in a string of stock issues. But now stock investors as well are retreating from wireless deals as that market becomes more turbulent. ``They are shying away ... because it is too speculative,'' says Tora Simmers, co-head of stock syndication at CS First Boston. The companies coming to market are viewed as risky bets since they don't have current earnings or cash flow but do have huge capital-spending requirements. And without an equity offering, it is hard to place junk bonds since bond investors want to see stockholders beneath them in the capital structure of a company. But not everyone is ready to say the game is over. ``If the wireless communications industry takes off like people think it will, these bonds will work,'' says Mr. Simpson at Bear Stearns. ``I'm confident that ultimately we'll fund a lot of successful companies.''
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