NEW YORK-Start-up players in personal communications services are at an awkward and critical juncture where riding the accelerator is necessary to roll out service and riding the brake is required to get public financing.
“There is a divide right now that I’d characterize as huge, fat and difficult … but temporary,” said Marisa Harney, director of the global telecommunications group at CIBC Wood Gundy Securities Corp., New York. “There is a bit of the cart-before-the-horse here, with a rapid need for funds, a simultaneous need for buildout and so many competing offerings that no one (in the investment community) knows who the right guy is to pick.”
The green light is on, beckoning new wireless carriers to construct their networks, turn on service and get paying customers. At the same time, however, a red caution light is flashing in the public capital markets on both the debt and equity sides of the road show. One indicator-March madness at the Nasdaq national market, home for many, if not most, publicly traded high-tech companies.
While equity is sexy and flashy, the public debt market has deeper pockets by far, especially on the high-yield end of the spectrum that many wireless carriers tap. “The absolute amounts of capital available are much higher in the high-yield market,” said H.C. Charles Diao, senior managing director, Bear Stearns & Co. Inc., New York.
The high-yield debt market in the United States is unique in the world. Domestic wireless carriers seeking to tap it not only are competing against each other, but also against foreign wireless companies and against the vendors that have loaned domestic telecommunications providers money to purchase network and handset equipment. A key reason for the huge amounts of vendor financing required by PCS entrants is their choice of Code Division Multiple Access, which is inherently more equipment intensive than other wireless technologies, said Eric Goldstein, senior analyst, speculative grade ratings group, Moody’s Investors Service Inc., New York.
Warned by debt rating agencies like Moody’s and Standard & Poor’s Corp. that their own credit ratings are jeopardized by the amount of money they’ve loaned new carriers, equipment vendors are seeking to lay off these loans in the form of public debt offerings. Several billion dollars of such deals are anticipated this year, according to Jim Kuster, managing director, Chase Securities Inc., New York.
Because personal communications services carriers aren’t in a position to generate cash flow early on in their life cycles, some have been forced to turn to a specific type of high-yield debt financing-discount notes. In this type of an issue, some PCS companies like InterCel Inc. plan to or already have raised more principal than they need, the idea being to use the over amount to start repaying the debt. As with zero coupon bonds, investors pay up front less than the face value at maturity of the securities, and their repayment at maturity is the difference between the face value and what they paid originally.
The fact that PCS providers are going the route “of overfunded structures, to me at least signals the (debt) market is tapped out,” Goldstein said in late March. “(And) in the last two weeks or so, the market has dried up for discount high yields.”
Furthermore, given the huge amounts of telecommunications high-yield issues that have been purchased in recent years, Goldstein said that satiated investor appetites may not be a short-lived phenomenon.
“It could be a short-term moment of indigestion, but I tend to think not,” he said. “Now we’re seeing the more raggedy, the more questionable deals.”
Furthermore, bondholders take comfort in knowing that companies they lend money to also have stockholders who have risked their own equity capital. To paraphrase lyrics from that old song, equity and debt go together like a horse and carriage … I’m telling you brother, you can’t have one without the other.
A number of new PCS carriers have been in registration for initial public offerings for several months, at least: Chase Telecommunications Inc., Houston; General Wireless Inc. PCS, Dallas; NextWave Telecom Inc., San Diego; and Pocket Communications Inc., Washington, D.C.
The inherent opportunity as well as riskiness of investing in new wireless telecommunications carriers is evidenced by the reluctance of many Wall Street bankers to discuss the financing outlook for PCS companies. Underwriting is a legal obligation to purchase securities, even if the original purchaser, i.e. the investment bank in the syndicate, finds it cannot resell these securities to other kinds of investors, be they individuals or institutions.
To spread the risk around, underwriting syndicates for many new wireless companies seeking to go public contain many, not just a few, investment banks, even if the lead underwriters named on a preliminary prospectus for a pending securities offering number only two or three. Once a proposed public financing has been registered, as required, with the Securities and Exchange Commission, a lengthy “quiet period” for participants begins, and it doesn’t end until well after the initial sale date of the deal.
The next four months are a critical period for PCS companies, in the view of Robert W. Stuart, managing director of CIBC Wood Gundy’s global telecommunications group. “Things just have to move forward,” he said.