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Wireless Telcos Tapping Junk Bond Market for Cash

Carolyn Koo

After a dearth of financing opportunities for the better part of a year, wireless service providers are finding an opening -- in the form of the junk-bond market. Just in time, too, because they've got a great need for capital if their businesses are going to grow.

A host of corporations in a wide range of industries have taken advantage of the Federal Reserve's surprise reduction of the Fed funds rate by half a percentage point earlier this month, a move that enables them to borrow more cheaply.

Nextel Communications (NXTL Quote), the nation's fifth-largest provider of wireless telecommunications service, recently availed itself of this window, issuing $1.25 billion worth of junk, or high-yield, bonds in a private placement. The 10-year senior notes carry a coupon of 9.5%.

Nextel's deal marks the end of a nearly year-long financing drought for wireless telcos. Though some of the companies aren't in dire need of cash, they'll soon require capital to build their businesses by expanding networks and buying spectrum, or the range of electromagnetic frequencies used in the transmission of voice, data and video. And it may be wise for them to take advantage of funding opportunities now because the drought could return, leaving some of these companies right where they were before.

Getting Ready

"Some companies are just continuing to build up excess cash, a cushion just in case the market closes down again," says Eric Goldstein, a wireless analyst at fixed-income house Grantchester Securities. He posits that Nextel is likely raising money to buy spectrum in the next auction due to start March 6. With this latest infusion, the Reston, Va.-based company has $9.25 billion at its disposal, including cash, bank credit lines and bond issues. (Goldstein rates all but one of Nextel's bond issues a hold, with the exception rated a buy. His firm hasn't done underwriting for the company.)

Indeed, Nextel said it'll use the proceeds from the bond issue to fund its network expansion and acquire additional spectrum, in addition to other purposes.

Other lucky wireless companies that tapped the junk bond market in the last month include Tritel PCS, a subsidiary of TeleCorp PCS (TLCP Quote), the largest affiliate of AT&T Wireless (AWE Quote); Triton PCS Holdings (TPCS Quote), another AT&T affiliate; and American Tower (AMT Quote), which operates broadcast and communications towers to wireless telecom providers, as well as other companies. All three of those deals were increased in size, by anywhere from 40% to more than 100%.

Sprint PCS (PCS Quote) affiliate Alamosa PCS (APCS Quote) is in the process of issuing $200 million in bonds, an issue that may well be increased to $250 million. Another Sprint affiliate, privately held Independent Wireless One, is also in the market for a deal now, according to Goldstein. (An affiliate assists a larger carrier in building out a nationwide network.)

Stock Shock

"The telecom companies got really shut out [of the capital markets] last year and saw their stocks get whacked," says Frederick Moran, an analyst at Jefferies. Sprint PCS and Nextel are down 54% and 60%, respectively, from their 52-week highs, while AT&T Wireless is down 30% and VoiceStream Wireless (VSTR Quote) is down a comparatively scant 25%.

With few financing options for these companies, those that did go to market paid a high price for the privilege. Take SpectraSite Holdings (SITE Quote), a provider of antennae sites and services for wireless concerns. In mid-December, it went to market with $200 million worth of 10-year senior notes, rated B3/B-minus. The 12.5% notes yielded 13.25% more than Treasuries.

That was the situation until Alan Greenspan waved his magic wand and revved up the market with a surprise rate cut on Jan. 3.

But because that's the only reason the junk-bond market has reopened, the bounce won't last long, argues Goldstein of Grantchester.

"The high-yield market is doing as well as it is more for technical reasons than anything else," he says. "The Fed rate cut was nothing more than a psychological impact."

Liquidity

The rationale: The weak market at the end of 2000 prompted a selloff that left high-yield bond funds with excess cash. The liquidity situation was accelerated by the Fed's rate cut, thus causing bonds to run and spreads to tighten.

High-yield bond fund outflows totaled $11.4 billion in 2000, as compared to the $2.4 billion in outflows for 1999. In contrast, year to date through Jan. 22, those same funds recorded inflows of $1.9 billion, according to Trim Tabs Financial Research, a mutual fund flow tracking service.

However, "As more paper is issued, the excess gets absorbed," Goldstein notes. "With a slowing economy, it will be business as usual."

But for now, the chance to raise cash through a debt issue is vital because the equity market continues to play possum. Initial public offerings slowed to a crawl in the fourth quarter of 2000, and so far in 2001, only one issue, self-underwritten, has made it to market. Meanwhile, Verizon Wireless, the largest wireless carrier in the U.S., has waited five months to go public with nary an end in sight, after an aborted attempt last fall, and the second-largest, Cingular Wireless, is also waiting to dip an experimental toe in the IPO waters sometime this year.