NEW YORK-Demands of the private placement and public issuance debt markets are likely to
compel consolidation among lesser-known wireless companies as a condition of gaining access to this sorely needed
capital.
“The current outlook is that very few have access,” said Kingman D. Penniman, president and
chief executive officer of KDP Investment Advisors Inc., Montpelier, Vt. “For new players, there is none. For
those perceived to be weak, it is highly unlikely. Incumbents are paying more.”
As a result, Penniman and
Timothy E. Caffrey, director of corporate finance for Standards & Poor’s Corp., New York, predict further wireless
industry merger and acquisition activity. The two spoke at the recent Wireless Industry Finance ’98 conference
sponsored by International Business Communications, Southborough, Mass.
The yellow light for newer entrants
seeking debt financing went on this fall despite multibillion-dollar inflows of investment capital into mutual funds,
Penniman said.
“High-yield debt now is recognized as a separate asset class. A lot of money is coming in, and
there is a lot of pressure to put that money to work,” he said.
Furthermore, the caution signs about access to
debt capital are up despite the fact that by the first nine months of 1998, as much debt had been sold ($100 billion) as
had been sold in all of 1997. As of Dec. 4, nearly $120 billion in total had been sold.
In 1997, the communications
sector just topped $20 billion in deals. The KDP communications universe includes paging and messaging, satellite,
personal communications services, wireless cable and competitive local exchange carriers.
When year-end 1998
totals are tallied, KDP projects the sector will reach at least $28 billion. Of this, about $5 billion was sold in November
and December, often by more established or well-known communications companies seeking a market timing
advantage for pre-funding their capital needs.
“Incumbents have an advantage,” Caffrey
said.
“They could have weaker financials and get a better rating than a less-leveraged but newer [personal
communications services] company.”
A better rating translates into improved bond buyer confidence in, and
reception to, new debt issues by companies. Standard & Poor’s has divided the company credit profiles of wireless
carriers into four major categories as far as their risk-reward ratio is concerned, Caffrey added.
Carrying the highest
risk and highest reward are the metropolitan statistical area cellular companies, which tend to be owned by regional
Bell operating companies and serve large, urban markets.
Rural service area cellular carriers have a lower risk,
lower reward profile than MSA cellular operators.
Personal communications services companies typically are
“start-ups with the highest risk and highest potential gain because they are getting a disproportionate number of
the net customer additions,” Caffrey said.
Enhanced specialized mobile radio carriers “have surprised us
positively and we have a positive outlook on them although they are carrying high levels of debt,” he
added.
Recent telecommunications issuers are characterized by six primary attributes, Penniman said: investor
confidence in management, a coherent and focused business plan, a promising technology, a staged system or one
nearing completion, a company at or near break-even cash flow, and the availability of other funding like unrestricted
cash, vendor financing or additional owner equity.
“As the domestic wireless industry has grown, it has had
no modesty in tapping the high-yield (debt) markets-from $4 billion in 1995 to more than $28 billion in 1998,”
Penniman said.
“The high-yield market has been surprised by your capital needs because you had
underestimated them,” he told conference attendees.
As of early December, communications/wireless issuers
accounted for 216 deals and 24 percent of total high-yield bond issuance. The cable TV industry, whose deals
comprised 6 percent of total new issue volume, is the next largest sector in the domestic high-yield
market.
“There is a close correlation between the performance of the high-yield market and the performance
of the telecommunications industry,” Penniman said.
At the same time, the telecommunications sector is a
risky business for bond investors. For 1997 and the first 11 months of 1998, telecommunications deals accounted for
one-third of all issues rated B-minus or less, generally considered the speculative-grade category. Telecommunications
debt also accounted for 71 percent of those bonds that are in the lowest tier, rated CCC and below, including those
without any rating.
“Despite its high risk profile, telecommunications has been a home run for the high-yield
community, with average annualized returns of 21.5 percent from 1995 to 1998, compared with the (overall) average of
14 percent,” Penniman said.
However, total returns on speculative-grade bond issues were off by 42 percent
during the first nine months of 1998, he added.
“There has been a flight to safety from risk. Issuers must
minimize the financial risk to bond buyers by moving them up in repayment priority because no amount of yield
compensates for loss,” Penniman said.
“And they must communicate an exit strategy through mergers
and acquisitions or partnerships.”
