Manufacturers are under pressure to finance independent personal communications services companies, but recent financial turmoil surrounding some C-block carriers highlights the risk involved in extending credit to companies whose only assets sometimes are licenses not yet paid for.
“There is an inordinate amount of pressure to finance C-block carriers,” said John Powers, director of sales and operations for the central United States for Motorola Inc.’s Cellular Infrastructure Group. “All vendors felt the squeeze to fund these guys.”
As such, vendor financing is a touchy issue within the wireless industry. Some notable larger vendors were wary to talk about the subject for this article.
Bruce Hyman, a director with Standard & Poor’s, said, “Vendor financing has had some affect on the financial capacity of some of these manufacturers. They limit their exposure, though.”
One of the ways they do that is by selling the debt to a pure financial player at a discount, said Hyman.
Independent PCS companies are generally rated by Standard & Poor’s in the speculative single-B debt category, said Tim Caffrey, a director with the firm. Manufacturers that extended credit to B-rated companies have experienced some lowered ratings, he said.
A single-B debt rating indicates a company with greater vulnerability to default but currently has the capacity to meet interest payments and principal payments, according to Standard & Poor’s. In addition, the single-B rating points to adverse business, financial or economic conditions as factors likely to impair the company’s capacity or willingness to pay interest and repay principal.
“Phone systems are capital intensive, and they require billions up front,” said Caffrey. “They are competing with cellular, and they need good coverage so they need a lot of money.”
Calling Omnipoint Communications Inc. a success story, Robert W. Stuart, managing director of the global telecommunications industry group at CIBC Oppenheimer, said it is necessary to make a distinction between those C-block carriers that are in trouble and those that aren’t. “Some of those companies have been meeting their obligations and making payments to lenders, including vendors,” he said.
“The C-band was unusually expensive,” Stuart continued. “Some companies who only had licenses in the C-block got themselves in trouble. They paid a premium for the licenses and couldn’t support themselves in the market.”
Despite any riskiness involved, Hyman said he believes vendor financing has contributed to the growth of the industry. Manufacturers, he said, extend financing to carriers with long-term sales in mind. Upgrades, maintenance agreements and other additional services and products provide potential future income.
Smaller PCS carriers, especially those trying to launch networks in second-tier cities, have had to look for alternative infrastructure options, said Peter Carlino, director of business development and communications for Summa Four. The company’s VCO product line is priced lower than traditional switches and is scalable and programmable.
PCS carriers often launch their networks in larger cities first, which justifies the cost of a traditional switch, said Carlino. But companies servicing second-tier cities are having difficulty securing financing from vendors or from Wall Street, he said.
“Vendors are being more selective than they were before,” said Stuart. “They’re not throwing money at everyone who has capacity.”
Summa Four does not provide vendor financing to carriers, but Carlino said carriers have had to learn to be creative about getting financed.
“They went to bat with traditional solutions and found out those weren’t going to fly on Wall Street,” he said.
CIBC Oppenheimer’s Stuart said most vendors maintain a separate financing division and have in place controls to ensure that their financing agreements are sound.
Motorola handles all of its financing arrangements through a separate division that functions like an internal bank, said Powers. Motorola Credit Corp. does standard financial reviews before extending credit to anyone and PCS financing opportunities are weighed against the merits of other opportunities worldwide, he said.
“We look at it the same way most lending institutions would. We’re pretty careful in our process,” said Powers, who noted that every C-block operator Motorola has financed is now operating.
Powers said Motorola had been criticized early for being too conservative in financing C-block operators, but “it looks like we made the right decisions,” he said.
Complicating the issue of financing the C-block is the fact that the Federal Communications Commission financed the licenses, giving them a first lien on a company’s assets. For A- and B-block licenses, as well as cellular, license winners created subsidiaries to hold the licenses and then pledged the stock of those holding companies to secure financing.
“That has been troublesome in structuring deals,” said Stuart.
