Debt markets thaw for telecom carriers

A spate of new loans secured by telecom carriers of late suggests that the debt markets may be finally opening up to the sector, especially as two carriers in particular – Qwest Communications and Frontier Communications – raised more than they had expected.

Frontier sold $600 million in five-year notes Friday after originally looking to raise $300 million. Qwest announced having raised $750 million in new debt yesterday, after initially intending to raise less than half that amount. And on Monday Level 3 announced a new $220 million tranche in an existing $1.4-billion credit facility arranged by Banc of America.

“In my view, this is the continuation of the trend that began in January,” said Gerald Granovsky, vice president and senior analyst for Moody's Investors Service. “There are a handful of names in telecom that investors are comfortable with, and there seems to be a meeting of the minds on both sides that a 10% yield is reasonable for raising debt in the current market.”

The interest on Qwest’s new debt is 8.375%. Frontier’s is 8.25%. And Level 3’s new loan comes at 850 points above LIBOR, with a minimum for LIBOR set at 3%.

“Level 3 may be a different animal in that there's so much debt out there that it's probably not in many people's interest to see the company go under,” Granovsky said. “So you continue to kick the can down the road until they start consistently generating free cash flow. That has been their survival strategy for about a decade.”

In general, carriers can use new debt to pay down old; for example, about $792 million of Qwest’s $5.1 billion in debt is due this year. But a softening of the credit markets could also help carriers with much-needed consolidation that the harsh credit environment has stalled in recent years.

“One thing’s for certain -- financing for traditional CLECs will remain very difficult,” Granovsky said.