At Ascend, Lending the Customer a Hand

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Data networker Ascend (ASND) - Get Report lends risky customers money in order to win their business, illustrating the fiercely competitive nature of networking.

In an interview with

TheStreet.com

, CFO Michael Ashby confirmed Ascend is lending money to competitive local exchange carriers, or

CLECs, a new breed of phone company. These loans, called working capital loans, are new to Ascend -- and, in this case, to Wall Street, which until recently was unaware of Ascend's decision to lend to customers.

"We have only just started doing these loans," Ashby says. This is because CLECs are forcing Ascend to match bids by rivals including

Lucent

(LU)

,

Northern Telecom

(NT)

and

Cisco

(CSCO) - Get Report

, according to Ashby.

In the third quarter five small, private CLECs exacted loans from Ascend in return for buying its network equipment. In case the loans aren't paid back, Ascend added an $8.7 million write-off to its "general and administrative" expenses.

"We've eliminated the risk entirely by writing it off upfront," Ashby says, adding that Ascend had to make the concession in order to compete.

In the past Ascend has provided some telephone-carrier customers with attractive financing terms by, for example, deferring payments for six months or so. But the new working capital loans are different, and carry an increased risk of default.

"That's obviously confused people, but the upside is if they pay for it," says Ashby who feels the five CLECs, which he declined to name, represent very low risk. The business practice will continue: Ascend likely will take a similar, smaller charge this quarter, Ashby says. The loans won't affect earnings estimates.

A Lucent spokesman says that for some time the company has lent money to customers, especially CLECs and wireless phone companies. The spokesman added that Lucent is careful not to damage its own credit rating by incurring risk; in fact, Lucent often sells the debt to outside financing firms. Ascend is trying secure similar arrangements. Cisco and Nortel could not be reached to discuss the issue.

Less-established CLECs have been financially squeezed as capital markets have dried up in recent months, a trend that threatens to damage growth in the network equipment sector.

"As the capital markets tighten up a bit, you would expect that CLECs would turn to vendor financing," in which they borrow money from the likes of Cisco and Ascend, says analyst James Henry with

Bear Stearns

. However, Henry says the 15 or so largest CLECs are healthy.

"I do not see incremental risk to Ascend or any of the other vendors," Henry says.

But another pro sees trouble.

"It appears that we're borrowing from the future to make dollars for today," says analyst Craig Johnson with the

Pita Group

.

For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.