CLECs milk public markets

Several trends are brightening the outlook of investors.

CLECs are increasingly tapping public equity markets of late, hoping to capitalize on generally improving views of the sector among investors. Three CLECs — Broadview Networks, ITC^DeltaCom and XO Communications — filed for public offerings in the same week last month.

Broadview, a regional CLEC in the Northeast, is trying to raise more than $287 million in the first initial public offering in the sector in years. Analysts say it should be well-received, as investors have taken note of a number of positive trends in the space.

“The overall [investor] sentiment for the space has been much more positive in the last year or two than it has been in the last five or six,” said Colby Synesael, an analyst for Merriman Curhan Ford.

Along with slow and steady improvement in CLEC balance sheets, carrier consolidation is making these stocks more appealing. The combination of major carriers such as MCI and Verizon made room for more bidders. And mergers such as Paetec's — of McLeodUSA and USLEC — lent economies of scale. Meanwhile, the past few years have given CLECs the chance to refinance much of their notoriously burdensome debt. The cooling of debt markets in recent months may correspond to CLECs increasingly turning to public equity as another funding source.

In fact, a good portion of CLECs' public funding efforts is aimed at debt relief. XO, which is raising up to $900 million in an unknown mix of debt and equity, says it will use the proceeds in part to pay down its $366 million in long-term debt. ITC is trying to raise up to $41 million by offering common stock to some investors at about half its current price. All the proceeds of this offering will go toward repaying some preferred stockholders for their help in ITC's debt refinancing this summer. The company refinanced its debt in July with the help of some existing institutional investors, who bought $41 million in newly issued preferred stock on the condition that ITC conduct a public offering to redeem those purchases.

As CLECs use public funds to pay down debt, investors are in turn becoming more forgiving of CLEC debt levels.

“As long as you can see some type of free-cash-flow-positive scenario a year or two out, a lot of investors are giving them credit that they'll get there and that their current debt balance sheets are manageable,” Synesael said.