NEW YORK-Publicly held long-term debt set an unwelcome record in 1999 as 147 corporate and sovereign issuers defaulted on $44.6 billion in bonds, more than double the $21.2 billion of defaults during 1999.
Moody’s Investors Service Inc., which released its year-end 1999 bond default report in late January, attributed the poor performance to two primary factors: a surge in issuance of lower-rated bonds and a hangover effect from the Asian economic crisis, which began in 1997.
The United States continued its dubious distinction as the largest single source of defaults throughout 1999, contributing to 95 defaults on $23.2 billion of long-term debt.
However, the outlook for 2000 is improving, the debt rating agency said. After peaking last April, bond defaults tapered off to their lowest levels of the year during the final quarter, when 26 issuers defaulted on $6.2 billion in debt. Of these 26, 21 are American companies.
Investor demand for high yields encouraged low-rated, first-time issuers of high-risk debt to enter the public capital markets in late 1997 and 1998. The fallout occurred during the first half of 1999.
“Many of these defaulters could only have entered the public debt market under conditions of exceptional tolerance by investors,” said Sean Keenan, vice president and senior analyst for Moody’s.
The aftershock of the 1997 Asian crisis, which “precipitated weakness in commodity prices and international trade,” also played a significant role in last year’s bond defaults.
The top three sectors that felt the most impact of this international situation were: the oil and gas industry, which accounted for 18 defaulters with a total of $4.4 billion in long-term public debt; the telecommunications industry, which comprised 16 defaults on $4.2 billion; and the shipping industry, which produced eight defaulters totaling $1.3 billion in debt.
Conxus Communications Inc., a four-year-old paging company headquartered in Greenville, S.C., filed last May for Chapter 11 bankruptcy protection in Wilmington, Del. It defaulted on $100 million in senior subordinated notes due 2001.
“Intensified competition and launching delays for its new product due to network problems aggravated the company’s liquidity problem,” Moody’s said.
FWT Inc., a Fort Worth, Texas, designer, manufacturer and marketer of wireless infrastructure products, filed for Chapter 11 bankruptcy protection last April. It defaulted on $105 million in senior subordinated notes due 2007.
“The company’s operations have been adversely affected by a significant slowdown in new business from wireless carriers, in addition to the sudden and unanticipated cessation of the tower building program by its largest customer in late 1998, as carriers have started to focus on collocating their radio equipment on existing towers rather than on new construction,” Moody’s said.
Satellite telecommunications carriers accounted for a substantial amount of defaulted debt. Units of Iridium L.L.C., Washington, D.C., defaulted last July on $1.45 billion in senior notes due 2005 “following the decision by its main investor, Motorola Inc., not to contribute financially to the debt-laden satellite phone venture prior to any restructuring,” Moody’s said.
“Although the company became the first global satellite phone and paging company by launching its handheld mobile satellite service, it suffered from a poorly timed marketing campaign that announced the service before handset and other equipment was available, as well as prohibitively high pricing for the service.”
ICO Global Communications Holdings Ltd., London, defaulted last July on $567.1 million in notes due 2005.
“Due to significant start-up costs, continuing operating losses and no meaningful cash flow expected before 2001, the debt-laden company is further behind its project of becoming the third satellite-based mobile telephony (company) after Iridium and Globalstar,” Moody’s said.
SmartTalk TeleServices Inc., a Dublin, Ohio, provider of prepaid wireless and wireline calling cards and services, filed for Chapter 11 bankruptcy protection in January 1999 and agreed to sell its assets to AT&T Corp. SmarTalk defaulted on $150 million in convertible subordinated notes due 2004.
“The company’s aggressive expansion through acquisitions and marketing of its products resulted in ballooning leverage and operating losses,” Moody’s said.
“In addition, SmarTalk’s questionable accounting practices and methods relating to revenue recognition and accounting for acquisitions led to the restatement of earnings and a slew of lawsuits.”
Technology Resources Industries Bhd., Malaysia’s largest cellular carrier, defaulted in October on $175 million in convertible bonds due 2004. “A drop in subscriber numbers due to the build-up of GSM prepaid services, together with intense competition in the cellular market, has adversely affected the company’s operating position,” Moody’s said.
“Moreover, the collapse of the ringgit in mid-1997 rendered debt payments in U.S. dollars more difficult.”
Teletrac Inc., a Carlsbad, Calif., provider of wireless fleet management services in a dozen domestic metropolitan markets, filed for Chapter 11 bankruptcy protection in Wilmington, Del., last June. It defaulted on $105 million in senior notes due 2007.
“Limited customer growth and considerable costs for network buildouts led to recurring losses since the company’s inception in 1996,” Moody’s said. Teletrac’s “rapid debt-financed expansion program resulted in excessive leverage and liquidity problems.”
