NEW YORK-Debt downgrades for telecommunications carriers last year outnumbered upgrades by a two-to-one margin, setting the stage for increased pressure on ratings this year, analysts for Standard & Poor’s Corp. said.
The freewheeling initial public offering market of the late 1990s gave new players unrealistic expectations of unlimited future capital raising opportunities, Richard Siderman said during the S&P teleconference Jan. 17. Consequently, start-up service providers, particularly competitive local exchange carriers, began executing their business plans before they were fully funded.
“The usual response was `we’ll go back to the markets,’ which had been so receptive but are now closed,” Siderman said.
“S&P continues to extol the virtues of pre-funding a business plan as outweighing the disadvantages of higher coupon debt.”
WinStar Communications Inc. stands out among wireless CLECs. The company has obtained $2 billion additional vendor, bank and private equity funding for 2001 and expects to become EBITDA positive this year, Catherine Cosentino said. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.
Standard & Poor’s has upgraded WinStar’s rating to B from B-. By contrast, the B- rating of Teligent Inc. and the CCC rating of Advanced Radio Telecom Corp. are on CreditWatch with negative implications.
Despite Teligent’s recent announcement of a $250 million equity investment, S&P is waiting to see if the carrier can obtain sufficient funds to finance all its cash requirements this year. The rating agency also believes Teligent needs a “substantial increase” in its subscriber base, Cosentino said.
“ART has had limited execution of its business plan, which has been reformulated several times,” she said.
“It must meet buildout targets under its vendor financing agreement with Cisco Systems or it may not be able to renegotiate it.”
Rapidly declining wireline long distance prices and the prospect that Internet Protocol telephony will make such calling “cheap or free” also contributed substantially to the large number of telecommunications debt downgrades last year, Siderman said. Interexchange carriers like AT&T Corp., Sprint Corp. and WorldCom Inc. are notable examples of companies affected by this trend.
Standard & Poor’s, which downgraded AT&T’s corporate debt rating to A from AA- in November, has maintained its “CreditWatch with negative implications” on the company, Rosemarie Kalinowski said.
While the rating agency believes AT&T’s plan to divide itself into four distinct business units is promising, “uncertainties remain about the competitive position of each,” she said.
On the bright side, S&P is encouraged that AT&T will reduce its debt leverage as the result of NTT DoCoMo’s $9.8 billion, or 16 percent, investment in AT&T Wireless Group, she said.
WorldCom, now rated A-, also is on CreditWatch with negative implications because of the “bleak prospect for increased revenues and its increased spending on data initiatives,” Kalinowski said.
The rating agency is withholding judgment pending the company’s expected announcement in a few weeks of detailed plans for “realignment into MCI and WorldCom tracking stocks,” she said.
Standard & Poor’s has affirmed Sprint’s BBB+ corporate rating but maintained a CreditWatch with negative implications on the company.
“Sprint has accelerated its wireline and wireless data investment to offset declining long distance revenues,” Kalinowski said.
“Sprint expects to spend $5 billion in capital expenses in 2001, of which $3 billion will be (Sprint) PCS equity, which is essential for retaining its current rating.”
Besides “a glut of bandwidth” that relative newcomers like Qwest Communications and Global Crossing are making available, “e-mail and wireless communications also are competing with (landline) long distance,” Kalinowski said.
Sprint PCS affiliates, including Alamosa PCS Holdings Inc., AirGate PCS Inc., Ubiquitel Inc. and US Unwired Inc., offer a bright spot in this gray universe, Maria Lemos said.
“We expect them to break even in their fourth year of operations, and this compares favorably to other successful startups,” she said.
“While their lack of (spectrum) license ownership is a risk to bondholders in case of default, the major trends in network deployment, subscriber additions and high ARPU (average revenue per unit) levels are positive.”
If their cash flow improves and they can maintain ARPU levels, the Sprint affiliates can anticipate possible S&P debt rating upgrades this year, Lemos said.
