NEW YORK-In response to high levels of customer growth and usage, Nextel Communications Inc., McLean, Va., plans to accelerate construction of its nationwide network this year with at least $1.3 billion in privately issued debt securities.
Nextel is an enhanced specialized mobile radio carrier targeting businesses that have a large force of mobile workers with its bundle of services, including cellular telephony, paging and alphanumeric short-messaging.
Its customers more than quadrupled in 1997 to 1.3 million from 300,000 the prior year, while average monthly revenue per customer rose to $68 from $56 and monthly customer churn averaged just 1.4 percent. Its 800 MHz integrated Dispatch Enhanced Network covers about two-thirds of the U.S. population and 75 of the largest metropolitan statistical areas.
“In order to accommodate the higher future growth in subscribers and higher usage levels than previously anticipated, (Nextel’s) total capital expenditures are expected to be about $1.5 billion in 1998 … (Most) … are expected to be funded with debt, including bank (loans),” said Rosemarie Kalinowski, telecommunications analyst for Standard & Poor’s Corp., New York.
Standard & Poor’s assigned a speculative grade rating of CCC+ to private placements of two Nextel debt issues: $800 million in senior serial redeemable discount notes due 2008 and $500 million in exchangeable preferred stock. Moody’s Investors Service, New York, accorded a speculative grade rating of B2 to the notes and caa to the preferred stock.
“The announcement of lighter phones with longer battery life and richer features and the 1998 emphasis [on] adding … network capacity and greater in-building coverage, position the company to expand its potential customers to include professional work groups,” said Robert Konefal, senior vice president, and Douglas Bontemps, senior analyst, for Moody’s Corporate Finance Group.
While also commending Nextel for maintaining focus on its initial customer base in the blue-collar work force, Moody’s said Nextel must manage the risks inherent in fast growth.
“For instance, as the company broadens its potential customer base, it will become more dependent on third-party sales channels and less on its direct sales force,” Konefal and Bontemps said.
Despite those caveats, Moody’s said it expects Nextel to achieve positive cash flow during the third quarter of this year, although the carrier’s debt leverage will remain high for several years. Standard & Poor’s said it believes Nextel will turn cash-flow positive next year, despite high leverage for the next three years.
Both rating agencies also upgraded their speculative gradings ratings on about $3.7 billion of outstanding debt by Nextel and related companies, Dial Page Communications Inc. and OneComm Corp. Moody’s also raised to Ba3 from B1 its speculative grade rating on Nextel’s amended bank credit facility, which now has a $3 billion limit and a new expiration date of 2006.
“[Nextel’] ratings could be upgraded (further) over the next two years, depending upon its ability to manage high growth levels successfully and improve cash flow,” S&P’s Kalinowski said.
