DEBT-LADEN CARRIERS HIT PAYBACK TIME
Having cut costs as much as they can, carriers are now attacking one area of the balance sheet they can no longer ignore: debt. Some have begun de-levering; others say it's not needed. Can they all stave off bankruptcy?
 and WorldCom insisted they could slash debt with existing cash flow and wouldn't file for bankruptcy. Carrier1, a European wholesale carrier, suspended operation on its U.S. voice network after failing to sell a debt-for-cash-and-equity deal to bondholders.</p>
<p>“Companies, to some degree, have been sacrificing their income statement for the benefit of their balance sheet,” said Doug Colandrea, senior fixed income telecom analyst for Morgan Stanley. “Companies that didn't place a lot of importance on [free cash flow] throughout 2001 are paying a price.”</p>
<p>WCG came under the most intense scrutiny after banks notified the company it may have violated a debt covenant and could be in default on its loans. WCG disagrees with the banks' position and declined to specify the covenant, but President, Chairman and CEO Howard Janzen said it wasn't financial. Instead, he said the covenant in question is “boilerplate” and “an assessment that is probably more qualitative than quantitative.”</p>
<p>To help quell the banks' concerns and ease investor fears, WCG stopped purchasing its securities, limited transactions through certain subsidiaries and decided against using a $525 million credit line until mid-2003. Williams, which recorded a $372 million loss that included a $215 million charge related to Winstar Communications, extended the negotiation for its credit agreement until the end of February.</p>
<p>To date, WCG has borrowed $975 million from the bank group under the existing terms of its credit facility.</p>
<p>The banks just wanted to make sure Williams had the cash, said Howard Kalika, senior vice president of corporate finance and treasurer for WCG. “If they see cash going out the door to purchase junior securities, that's something banks don't typically care for,” he said. “That was the right process to start de-levering our balance sheet.”</p>
<p>Without stating a debt target, Janzen acknowledged that WCG is considering several options, including selling some real estate-related assets or foreign operations.</p>
<p>“We have an extensive list of opportunities,” Janzen said. “The breadth of those options are facilitated by the fact that the company is executing in this market, and we have over a billion [dollars] in cash on our balance sheet.”</p>
<p>He also emphasized that bankruptcy isn't an option the company is considering.</p>
<p>Echoing that sentiment was WorldCom CEO and Chairman Bernard Ebbers, who took the unorthodox step of addressing market rumors during the carrier's fourth-quarter earnings call. “Bankruptcy or a credit default is not a concern,” Ebbers said. “To question the viability of WorldCom is utter nonsense.”</p>
<p>Despite debt of $28.45 billion, the company has a relatively light load for 2002 of $60 million in bonds maturing and $112 million other debts due this year. WorldCom also has a bank facility of $6.4 billion, which likely will be cut in half when it is renegotiated at the end of June.</p>
<p>“There is no need to have that type of backup to a commercial paper program that doesn't even exist,” said Scott Sullivan, chief financial officer and treasurer of WorldCom.</p>
<p>Qwest, which reported a 2001 net loss of $2.41 per share in late January, is taking perhaps the most aggressive steps to cut its debt. Qwest filed with the SEC last week to offer up to $2.5 billion in debt and equity securities. The move would eliminate about half of the $1.5 billion to $2 billion in debt it wants to cut this year.</p>
<div align=)
|
DEBT METRICS (all numbers in billions) |
||
| Q4 net income (loss) | Debt* | |
| Sprint (PCS and FON consolidated) |
($1.23) | $25.88 |
| SBC | $7.24 | $31.78 |
| Qwest | ($4.01) | $24.9 |
| Verizon | $0.39 | $96.76 |
| WorldCom | $2.07 | $28.45 |
| AT&T** | ($1.39) | $92.85 |
| BellSouth | $1.89 | $28.49 |
| *Debt calculated
by totaling debt due within next 12 months plus long-term debt and other
noncurrent liabilities **AT&T Wireless was reported in AT&T's income statements as a discontinued operation until June 2001 |
||
Chairman and CEO Joe Nacchio said the carrier is starting the debt reduction plan with the securities sale because it is the quickest alternative and “takes the pressure off the negotiation of any asset sale.” But as much as half of the proceeds will be linked to equity issuance, which dilutes existing shares. “The trouble is that equity is beaten down, and to issue it is very punitive,” said Matthew Crakes, a vice president for Merrill Lynch.
The rest of the debt reduction effort will be addressed by selling assets or securities associated with assets.
Nacchio said Qwest may sell wireless assets, its application service provider group or rural access lines. While all three are noncore assets, selling rural access lines appears to be the most likely scenario. “When we say access lines, we are looking to particular qualifications,” Nacchio said. “It will be a deliberate plan.”
Morgan Stanley's Colandrea believes Qwest should cut more than its stated $1.5 billion to $2 billion in debt. “That's the minimum requirement.”
A rural access line sale by Qwest — something analysts have anticipated for more than a year — should be easier than past large telco exchange sales, which have generated between $3000 and $4000 per access line. Last year, a planned sale of 560,000 lines to Citizens Communications collapsed after Citizens claimed Qwest overstated the earnings potential and refused to renegotiate the contract. (A lawsuit over the issue is currently in arbitration, according to a Citizens spokeswoman.)
Likely bidders for Qwest's rural assets, Alltel, TDS and CenturyTel — the so-called 2% telcos that are aren't regulated as strictly as Bell companies — are looking to expand. “Their ideal is to get up to the 2% level and stop,” said John Laprise, an analyst for New Paradigm Resource Group.
Moreover, a new rule within the Rural Utility Services program lets rural telcos apply for low-cost loans to acquire assets. “Right now is a great time to be selling those kind of assets,” Laprise said.
Qwest also could sell off its directory group, a move Broadwing made last week in a $345 million deal with CBD Media. A Broadwing spokeswoman said the company doesn't necessarily have a formal program for debt reduction, but “we have had the goal for some time to be free cash-flow positive. The advertising/directory business is not core to our business.”
Broadwing's payphone and payphone clearinghouse businesses also may be available soon. In announcing an operating loss of $171 million for 2001, Broadwing Chairman-elect and CEO Rick Ellenberger told analysts Broadwing is considering selling noncore assets to give the company a cash cushion.
With additional reporting by Toby Weber, Donny Jackson and Kevin Fitchard in Chicago.
