NEW YORK-For bond investors, high-yield debt deals by telecommunications and media companies are hard to ignore since they have constituted 30 percent to 40 percent of all new dollar-denominated issues in the last several years.
Of the $617 billion in this type of debt outstanding as of mid-June, nearly $112 billion in principal was sold by telecommunications companies and $90 billion by media companies.
Amid that issue surge, investors seeking to balance their portfolios and their risks must separate the wheat from the chaff before putting their money on the line, said Les B. Levi, a managing director at Chase Securities Inc., New York.
“Stay in front of consolidation, which drives spreads tighter and creates value, especially when investment grade companies buy junk bond companies,” he said June 16 at the New York Society of Security Analysts’ “High Yield Bond Seminar.”
Spreads represent the difference between yields on securities of the same maturity but of different credit quality.
In telecommunications, the sectors ripe for consolidation include wireless carriers, infrastructure builders, Internet service providers and competitive local exchange carriers.
However, potential consolidation is not the only benchmark for a good bond investment.
“Look for well-managed companies with valuable assets and viable business plans that will thrive even if not acquired,” Levi said.
A high-quality management team is especially important in managing execution of new business plans. Execution risk is one of the primary flavors of risk in the telecommunications high-yield bond market, he added.
Technology risk is another critical factor to consider, particularly when evaluating issues by paging and mobile satellite systems companies, Levi said.
“As [personal communications services] gets more functionality, it will reach more into paging’s market … Paging already is one of the dicier (high-yield) sectors (because) PCS already is cannibalizing paging by offering similar services for less money. Growth rates in paging are unsustainable,” he said.
“Is a company like Arch (Communications Group) obsolete? There is still a niche for paging, especially low-end, commodity paging. At the high end, two-way has found a niche and SkyTel (Communications Inc.) has seen some growth, but long term, it is headed for obsolescence.”
While paging is a relatively old technology in the wireless sector, one of the newcomers, satellite communications, confronts “a serious viability crisis today,” Levi said.
On the other end of the desirability spectrum, the new fixed wireless services providers appear to have a bright future and therefore make for promising investments, he said.
The federal government’s privatization of wireless spectrum not only created opportunities for mobile wireless carriers, like Sprint PCS, but also for an emerging group of wireless competitive LECs like Teligent Inc. and WinStar Communications Inc.
“The explosive growth in Internet and data applications is driving changes in networking technology [so that it has the] ability to handle high-speed data, voice and video in increasing volumes,” Levi said.
Regulatory reform also permitted regional Bell operating companies to spin off their cellular, paging and tower businesses, “creating a new need for high-yield financings,” Levi said.
As investors review prospects among telecommunications issuers of high-yield debt, another key criteria that warrants close scrutiny is a company’s liquidity risk.
“Will the company have continued access to (various sources of) capital to complete its plan? This is important, given that the (bond) markets tend to run hot and cold,” he said.
In May, 20 telecommunications and media companies were able to sell more than $6 billion in high-yield debt. That is, by far, the largest number of such companies and aggregate principal amount of junk bonds in this sector sold in more than a year.
