CREDIT CRUNCH: Telecom better off this time around

THE FINANCIAL MARKETS HAVE BEEN JITTERY in recent weeks, absorbing the fallout from the extension of easy credit to both individuals and corporations. Now, the backlash is likely to find lenders more closely scrutinizing business plans, mergers and company strategies to reduce their risks-and the wireless industry could find credit harder to come by or more expensive.
The roots of the trouble in the wider market can be traced to two places. One is the sub-prime mortgage markets, with mortgage-backed securities increasingly hard to sell to wary investors. Hedge funds and private-equity companies also have gone on borrowing sprees-in the case of private equity, to fund their leveraged buyouts. With a surplus of debt in the market, banks are tightening credit standards. The Federal Reserve cut its interest rate on loans to banks late last week, hoping to avert a credit crisis, and the markets responded by surging upward.
The phenomenon in the market is new, and no one knows whether it will blow over quickly or lead to an extended credit crunch.
“The service providers that are looking to refinance or otherwise raise new debt would run into roadblocks-as would everyone. This is like the rising water tide, as it’s global in nature,” said Anton Wahlman, managing director at ThinkEquity. He also said that a secondary effect could trickle down later to equipment providers.
Wahlman added that a credit shortage in August of 2000 affected CLECs at the time, but now the telecom space typically has larger companies that “are considered to be more stable and well-funded.”
“People have built in some cushion to at least avoid the catastrophic, downward-spiraling scenarios after the whole minor debt crisis among CLECs,” Wahlman said.
“High quality” deals are unlikely to be impacted, according to Peter Morici, professor at the University of Maryland School of Business. He added that the type of deals likely to be impacted by the credit crunch are probably the questionable ones.
“All that money is still sloshing around out there, it’s just kind of fallen into safer hands,” Morici said. Morici predicted a shake-out period of several weeks or months as the market settles down. But companies with shaky business plans or mergers and acquisitions with only vague strategies could end up facing higher interest rates from banks and simply not go through.
“I think there are deals that aren’t going to happen because you won’t be able to finance them,” Morici said. “And we’ll never know how many fewer deals.”
Roe Equity Research analyst Kevin Roe said that most wireless companies are financially better off than they were during the last big market disruption in 2001.
“This is a very different time than it was in 2001, when wireless companies were, many of them, over-levered,” Roe said. “Some of them, like Leap [Wireless International Inc.], had to be restructured. . Valuable lessons were learned back in 2001 and very meaningful restructuring took place. . So the sector, from a balance sheet perspective, is very healthy.”
Roe added that companies that were more vulnerable the last time around have either made financial progress (such as Leap and MetroPCS Communications Inc.) or put themselves up for sale (such as Rural Cellular Corp. and Dobson Communications Corp.). Meanwhile, “the big four . all have very strong balance sheets.”
However, Roe also noted one indicator that investors are nervous about is whether the Alltel Corp. private-equity deal will go through: the gap between the stock’s current price of about $66.45 and the $71.50 price promised when the company sells, is more than 7%. Alltel announced the buyout in May, and its stock peaked above $70 shortly after-but has since trended downward. The arbitrage spread is “so wide because it’s reflecting concerns over the deal either not happening or being repriced,” Roe said.