Financial fallout creates more funding challenges

While N.Y.-based Verizon Communications struggled to restore service and facilitate a re-opening of U.S. equities markets, the telecom world looked beyond the potential short-term dip in price performance to what will be long-term effects of last week's terrorist attacks.

Cover image: AP Photo/ Stuart Ramson Special Report Main Page

Although lost revenues and network damage will be isolated and minimal in the context of the larger network, the broader effect could be a further dampening of the sector for the next few quarters as consumers and businesses become more cautious about spending, said Ken Kotylo, telecom services analyst for William Blair & Co.

"I believe that this kind of event will hurt consumer confidence at the margin," Kotylo said. "To the extent [consumer] confidence is weaker and stocks are weaker, that's not good for companies looking for funding. Companies like Qwest and Verizon are going to be fine. For companies on the verge of bankruptcy, it's not good."

While horrific and deplorable, the attacks on the World Trade Center and the Pentagon might ultimately have a positive effect on telecom. The performance of some communications systems during the attack may refocus policymakers and businesses on the need for robust landline and cellular networks as well as redundant networks and backup systems, said Bill Bane, vice president of Mercer Management Consulting.

"The network creaked but didn't break," Bane said. "There will be an emphasis on making sure it creaks less."

However, telecom more likely will follow events in the overall economy, which already was teetering on recession.

The latest economic forecast from UCLA's Anderson School of Management suggested the U.S. is already there. The quarterly UCLA Anderson Forecast predicts negative growth in the gross domestic product for the third and fourth quarters of 2001 but expects an upturn in early 2002. (The classic definition of a recession is two consecutive quarters of negative GDP growth.)

The Federal Reserve's injection of more than $120 billion into the monetary system and the expectation that it will trim interest rates by 50 basis points the day after the markets re-open could hasten the recovery, said Vik Grover, senior analyst for Kaufman Bros.

"If [the Fed] keeps cutting rates, ultimately it will lead to lower interest rates in longer maturity bonds. Therefore, when investors sense a recovery, you will get a flight from quality debt," Grover said. "With yields for telecom debt at 25% to 30%, [now] nobody wants to take that risk."

Early indications in the bond markets, which opened Thursday, suggested that for the time being investors were shifting their money to more conservative investment vehicles such as U.S. Treasury bonds. "That doesn't translate into a company that desperately needs capital getting access to capital," Kotylo said.