ACCESS: Life after Debt

One of the biggest shames of the mad rush of the late-1990s buildout was the desperate reach for size by all the service providers. Every time Winstar announced that they were adding another three cities to their network, their stock would pop another few bucks. All the brilliant VCs and Wall Street analysts were sure that achieving grand scale was the key to success, and the capital markets pushed the many upstart carriers to build their networks as quickly as possible.  

That became a major headache, for the CLECs in particular. Tying their disparate networks into each other isn’t easy to begin with. But then they had to go and work out the logistics of leasing unbundled elements from the incumbent carriers, and the incumbents pulled every trick they could to sabotage the wholesale. And then the CLECs had to build a sales force in each city, and trying to provision lines once they were sold just made the whole model collapse. And so the CLECs—those that have survived, anyway—have been left for dead, restructured and re-capitalized or not.  

But a funny thing happened during the depression. All those surviving CLECs had to rationalize their models, and that meant cutting back in the geographies they service, ridding themselves of any and all excesses in the back office and sales offices, and ending all non-core initiatives. The end result: The CLEC model (as enforced by the FCC) actually works when it’s done right. And as the FCC continues to move in a CLEC-friendly manner, forcing the unbundling of the local loop and switch, the prospects of the CLEC industry are actually pretty solid now, as EBITDA and, in some cases, free cash flow and even--egads!--profitability have come to reality. 

Meanwhile, many of these companies have already gone through the Chapter 11 process and now have little or no debt. Those that do still have debts outstanding have mostly been granted access to capital to refinance any bills coming due. 

The big risks here are mostly regulatory in nature—if the FCC allows true FTTP autonomy by the RBOCs, over time the CLECs will lose relevance. If voice-over-IP and voice-over-broadband remain mostly unregulated (although the move by the various PUCs to regulate VoBB bodes poorly for free market services), the CLECs will lose what little consumer base they now have. Regardless, I think the CLECs are now in a sweet spot that should last at least a year or two, and survivability might soon turn to thrivability.  

Can you imagine?

Cody Willard is a hedge fund manager and commentator on RealMoney.com.