Falling Winstar

Pull up a chair — the fixed wireless deathwatch has officially started. Winstar and Teligent need capital fast to close funding gaps and possibly stave off bankruptcy.

Considered the healthier of the two, Winstar terminated 43% of its work force and halted its network expansion to preserve capital. It also announced it was delaying the filing of its 10-K report because it was in discussions over “material transactions.” A day after that announcement, Winstar's debt was downgraded by Moody's Investors Service and Standard & Poor's to low junk levels, meaning “the risk of a credit default is high,” said Bob Konefal, managing director at Moody's.

The job cuts and network freeze are designed to focus the company on its 5400 on-net buildings and reduce its $700 million in planned capital expenditures, a Winstar spokesman said. Indeed, the math shows that without additional funding or cost savings, Winstar will be up against the wall, said Ken Hoexter, analyst at Merrill Lynch. Winstar has barely enough cash to cover $550 million in cash payments on its $4 billion debt.

The company has about $800 million from vendor financing with Lucent Technologies, Cisco Systems and Compaq Computer, but that would have covered only capital expenditures and working capital expenses. And ailing Lucent — on the hook for $400 million — could back away, Hoexter said.

Winstar is trying to arrange additional vendor financing, a cash infusion or a wholesale deal with a long-haul carrier.

“We've created a tremendous amount of local broadband connectivity and could look to monetize it in a number of ways,” the Winstar spokesman said.

Prospective customers include Cable & Wireless, which may be looking for a fixed wireless partner after the bankruptcy of Advanced Radio Telecom (see story on page 22). Qwest, an investor in ART, is another possibility, but the backbone provider took pains to deny that it is acquiring or purchasing the assets of Winstar or any other fixed-wireless company.

“It certainly can become part of [Winstar's] business plan to wholesale to other carriers, but can it be a huge source of extra revenue long term? That's questionable,” said Adam Giansiracusa, analyst at Frost Securities.

Teligent is facing a deadline of April 30 to raise $250 million in vendor financing. If it doesn't, absent a waiver, it will be in default on an $800 million credit facility, a Teligent spokeswoman said. As of March 26, Teligent had $194 million in cash and cash equivalents on hand, only enough to last through the second quarter.

In December, Teligent landed a financing agreement with Rose Glen Capital Management, which agreed to purchase up to $250 million in Teligent common stock over an 18-month period. But the agreement was subject to a floor on Teligent's share price that the company currently does not meet, the spokeswoman said.

Just what got both companies to this point? According to analysts, both Winstar and Teligent pursued aggressive network buildouts, egged on by financiers. But neither have penetrated deeply enough into the customer base to cover their capital costs.

“They have no customers in the buildings,” said Brian Andrew, CEO and president of e-xpedient/CAVU, an in-building carrier that combines microwave radios with Ethernet to provide 100 Mb/s Internet access. “When they got to the building, they couldn't get enough revenue to pay for how they got to it — they spend $3 for every $1 they earn.”

Another problem, according to Andy Fuertes, vice president of communications research for Allied Business Intelligence, is that about 50% of their revenues is from reselling DSL lines, a business model that has proved to be a “massive failure.”

But fixed wireless is not dead, and there are other carriers that have broadband wireless licenses but haven't capitalized on them, said Peter Jarich, director of broadband research for The Strategis Group. He named Adelphia, McLeodUSA, AT&T, CenturyTel and Alltel.

“I haven't soured on the market yet,” Jarich added.