NEW YORK-CIBC Wood Gundy Securities Corp. “is on the threshold of making announcements” about deals to help some vendors finance the purchase of their wireless equipment by cash-poor, start-up American personal communications services providers, said Robert W. Stuart, managing director of the global telecommunications group.
“It is a recent phenomenon where things have become hyper-aggressive; vendors have been asked to supply financing. A number of vendors are reaching the `ouch’ level in terms of their own debt levels,” Stuart said at a Dec. 9 press conference.
“At first, they were looking to lay off their debt onto the banks, to sell it off at par with no lingering recourse. Now, the dialogue has shifted to, `What are the terms?”‘
He offered two general kinds of recourse financing techniques that could be employed. The first type is a remarketing arrangement in which the bank would be the financier; in the event of PCS system troubles, manufacturers promise to buy back their equipment at a certain price floor point.
In the second scenario, the bank would step in to fund the obligations provided there is a recourse provision back to the manufacturer, which is the creditworthy entity. As the PCS system operator reaches certain specified milestones, like subscriber or cash flow targets, the manufacturer’s responsibility for repaying the bank would decline proportionately.
“We do bridge financing but only after a tremendous amount of scrutiny,” Stuart said. “With bridge financing, it’s hard to know when you take your first step whether it’s a bridge or a pier.”
Stuart said he is optimistic that personal communications services will expand the wireless communications marketplace, and also will eventually take an increasing share of that growing marketplace. Some of the market share PCS takes will not only come from cellular services but also could be from high-end, two-way paging services.
“I don’t worry about the low end of paging, but at the high end, it gives me pause,” he said.
“At what point does two-way alphanumeric paging bump into PCS? If, for $2 more a month, I can get PCS, then there’s a problem.”
Stuart also said he believes that ultimately there will be six or eight PCS survivors due to a shakeout as much the consequence of federal law and Federal Communications Commission policy as of marketplace dynamics.
“Some of the lesser players who thought PCS was the next get-rich-quick cellular scheme will have a wakeup call in the next 18 months, and that will shake up the FCC,” he said. “The pops will have implicit value and there will be acquirers, (but) the acquirers will do more product evaluation.”
In their rush to reduce the deficit, federal legislators and regulators are dumping large volumes of spectrum into the wireless communications arena in a short period of time.
An incremental, staged approach would “guaranty solvency” for carriers that buy spectrum, he said.
“The FCC mandate to accelerate technology deployment and reduce the deficit I’m not sure is a good thing for the industry,” Stuart said. “It is subsidized but cut off from the banks. Banks are looking for implicit value from the value of the license, which is now owed to the FCC.”
For this reason, many PCS operators have gone instead to the high-yield debt markets for financing, he said. But he concurred with earlier assessments by other bankers that 1996 was the year when high-yield debt investors were put off by the speculative risk involved, which they viewed as having become equivalent to that of venture capital. Therefore, this financing alternative also has diminished for PCS players.
Asked if there exists a coterie of Wall Street bankers working together formally to lobby the FCC for changes, Stuart said he isn’t aware of any. However, he said that FCC employees in the Common Carrier Bureau and the Chief of Staff’s office know who the major bank players are and contact them directly for feedback periodically. This includes CIBC Wood Gundy.
Stuart said CIBC Wood Gundy, the investment banking subsidiary of Canadian Imperial Bank of Commerce, has been an active player in helping North American telecommunications systems and equipment providers invest abroad, notably: Ericsson Inc., Lucent Technologies Inc., Nokia Corp., Northern Telecom Ltd. and Motorola Inc.
In North America, it has banking relationships with several PCS carriers, including Clearnet Communications Inc., NextWave Telecom Inc. and Western Wireless Corp. Wireless communications is the fastest growing segment of the investment bank’s global telecommunications business, he added.
