NEW YORK-While wireless enterprises pose risks for and depress the credit ratings of their parent telecommunications companies, they also expand the overall market to the benefit of both entities, according to Frank Plumley, a director of Standard & Poor’s Corp.
Prompted by accelerating competition and deregulation of the telecommunications industry, Standard & Poor’s convened a teleconference recently to announce its internal review of methods by which it rates telephone parent and subsidiary debt.
Telephone giants like SBC Communications Inc., BellSouth Corp., AT&T Corp., Bell Atlantic Corp., Sprint Corp. and Southern New England Telephone control most original cellular licenses in the United States, S & P said. In fact, without the deep pockets of parent companies, the debt ratings of cellular subsidiaries would be much lower than they are and their ability to raise capital would be more difficult and costly.
But a decade of experience evaluating wireless has resulted in establishing and refining basic rating criteria that works, Plumley said. “The whole concept of wireless services has become more important than most anyone thought 10 years ago, with wider customer acceptance generating more revenues.”
In some ways, the more things change, the more they remain the same. “There is a constant theme. Debt ratings depend on two things: financial risk, [whether] they can pay their creditors-and business risk, [whether] they can make a profit.”
Although personal communications services will bring competition, “giants like AT&T, Sprint, and PCS PrimeCo [L.P.] bought licenses to do the same thing at a different frequency.” Building out the new PCS systems, including infrastructure construction and license payments, will entail similar-but not identical-kinds of financial risks to those incurred by the initial cellular licensees, Plumley predicted.
“Most debt taken on will be attributed back to the parent companies because we don’t think they’ll walk away from billions of dollars of investment*…*On the PCS side, the carriers want to convince us that PCS is project-level financing that has nothing to do with the parent, until [PCS] starts making a profit. Although the billions of dollars involved in PCS and other wireless services don’t help the parent companies’ debt ratings, PCS could fail miserably without hurting a company like Sprint.”
The greater variety of service that PCS operators offer, the more potential there is to grow the total market to the advantage of parent and subsidiary companies, Plumley said. But premium-priced PCS services will be competing with cellular providers that have long-established relationships with retailers. The retail market is an essential ingredient for generating sufficient revenues to repay debt holders. Furthermore, “no one is geared up to do volumes either on the infrastructure side or on the handset side,” he commented.
Standards also are in flux as PCS companies choose largely between Global System for Mobile communications-based systems and Code Division Multiple Access systems. “APC has demonstrated to skeptical audiences that GSM-based systems can be done; the defects are known but can be lived with.”
Getting over these hurdles is a significant challenge that will be closely monitored by the credit rating agency. In short, “it’s business as usual for us.”
