NEW YORK-Qualcomm Financial Trust I, wholly owned by Qualcomm Inc., San Diego, plans to sell a $450 million issue of convertible preferred stock due 2012 to help finance the parent company’s expansion.
In an announcement Feb. 18, Moody’s Investors Service Inc., New York, assigned a speculative grade “B1” rating to the proposed issue.
“Creditors … benefit from a book equity position of $855 million [as of] Dec. 31, and a market capitalization of over $4.2 billion,” said the rating agency report by James Parrish, managing director, and Eric Goldstein, senior analyst, both in the speculative grade ratings group. “It is Moody’s opinion, however, that Qualcomm’s leverage will likely grow due to its need to fund (both) the expansion of its business and the continuing buildout by [personal communications services] companies requiring vendor financing … In general, the need to provide vendor financing will consume the bulk of Qualcomm’s future capital needs.”
Of particular concern in the short term, Moody’s said, is Qualcomm’s loan of money to help buyers of its infrastructure equipment-many of them new companies-finance their purchases. This potential problem is exacerbated by the fact that the Federal Communications Commission forbids Qualcomm from taking a security interest in the licenses of some of those companies.
“Qualcomm’s financing agreements with Chase (Telecommunications Inc.) and NextWave (Telecom Inc.)-two C-block PCS start-up companies-are of immediate and particular concern,” Moody’s said.
Qualcomm has agreed to provide up to $108 million to Chase for a $140 million infrastructure equipment and services contract. Qualcomm owns minority stakes in both Chase and NextWave. Qualcomm hasn’t yet estimated the dollar amount of its agreement with NextWave, in which it will offer 100 percent financing and have the option to provide half of the required network equipment, Moody’s said.
However, mitigating these risks, the rating agency noted, is the fact that several major cellular and PCS carriers also have signaled a vote of confidence in Code Division Multiple Access technology by selecting it as their digital platform, including: AirTouch Communications Inc., GTE Mobilnet Inc., Bell Atlantic Nynex Mobile, U S West Cellular, PrimeCo Personal Communications L.P. and Sprint Spectrum.
While Moody’s said Qualcomm could benefit by licensing its technology to other CDMA manufacturers, the rating agency also said, “Qualcomm faces significant long-term competitive challenges in the manufacturing of CDMA equipment from more experienced and well-capitalized companies.”
Today, the main driver of Qualcomm’s earnings and cash flow is its operation of OmniTracs, a satellite-based, two-way mobile communications and tracking system, with “relatively strong and forecasted stable financial performance,” Moody’s said. Qualcomm also owns a 7 percent interest in Globalstar Telecommunications Ltd., which plans to launch 56 low-earth-orbit satellites to provide voice and data wireless services.
