Debt markets begin to thaw for telcos

When Windstream executives said over the past two years that inhospitable debt markets were putting roadblocks up to much-needed consolidation in the mid-sized and rural telco space, they weren't exaggerating. According to The Wall Street Journal, so-called “poison puts” — debt covenants triggered by acquisitions that sometimes require full repayment to bond holders — kept Windstream from being a more serious bidder for the assets of Embarq, which ultimately was snatched up by CenturyTel last year, thanks in part to the latter's investment-grade credit rating.

However, recent indications have emerged that the debt markets may be starting to thaw for telecom carriers. Frontier Communications — which some suspect was among the other serious bidders for Embarq — raised $600 million in debt in April after initially aiming for $300 million. A few days later, Qwest Communications — also hoping to raise $300 million — found $750 million. Meanwhile Level 3 Communications secured a new $220 million tranche on an existing facility arranged by Bank 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.”

Better access to debt markets could heat up M&A in the space. The five or so unsuccessful bidders for Embarq are likely eager to deal. Qwest, rumored to be selling its long-haul network, could become a rural consolidator. And CenturyTel's CEO said last fall that the company probably will make another acquisition in a year's time.

“One thing's for certain,” Granovsky said. “Financing for traditional CLECs will remain very difficult.“