Debt comes calling at telecom's door.

Wall Street's rapt attention on the unraveling of

Winstar

(WCII)

,

PSINet

(PSIX)

,

e.spire

(ESPI)

and

NorthPoint

, to name a few, isn't out of morbid delight, but rather is a search for clues as to what lies ahead for many more companies crippled by debt payments in the telecom services sector.

Winstar saw its shares plunge below $2 Thursday on concerns that it would be unable to finance its debt. (It closed Friday at $3.03.) PSINet, the 6-year-old granddaddy of Internet service providers, hired bankers Monday to restructure its debt while

warning that its shares, now worth 20 cents, may soon be worth nothing. Upstart Baby Bell challenger e.spire sought protection from creditors and filed for Chapter 11 bankruptcy protection Thursday. And NorthPoint, already in bankruptcy, auctioned off most of its equipment to

AT&T

(T) - Get Report

Thursday.

This debt pileup, which was flagged by

Lehman Brothers

debt analyst Ravi Suria in November, is merely the opening chapter to an ongoing collapse of overindebted, underfunded telcos. And as the list of casualties grows, networking gearmakers such as

Cisco Systems

(CSCO) - Get Report

,

Nortel Networks

(NT)

and

Lucent Technologies

(LU)

will find fewer buyers in the market, further dragging down their sales growth. All this, says Suria, is a consequence of having issued too many credit cards to too many telcos. (Lehman advised AT&T on the NorthPoint deal.)

Exceeding Cash Flow

After racking up staggering charges, outfits like PSINet,

Teligent

(TGNT)

, Winstar,

XO

(XOXO)

,

Rhythms NetConnections

(RTHM)

,

360Networks

(TSIX)

and hundreds of smaller firms face debt payments that in many cases exceed their cash flow.

While the problem is obvious for the service providers with share prices below $10, Suria says the market has yet to recognize that these same pressures also will likely be raining down on bigger players such as Web hoster

Exodus

(EXDS)

and mega-network builders

Level 3

(LVLT)

and

Williams Communications

(WCG) - Get Report

.

Suria's observations have proven to be accurate in the past. In a November report, he pointed out that PSINet's debt value was slipping with its yield in the mid-20% range and rising, Teligent already had risen to 30% and Winstar was up to 20%. As a company's bond price falls, its yield rises. Suria tends to count many of these companies' entry to bankruptcy in weeks and months.

With little or no cash coming in, these companies are sucked into a debt spiral, an often terminal condition of needing more loans to pay off existing loans. And that center may not hold much longer.

Broader Impact

As

TheStreet.com

wrote earlier this month, the banking sector continues to feel the pain from the telecom industry and likely will try to shield itself from more fallout. Hence the capital markets will be closed to many of the riskier companies.

To be sure, some companies have been able to

wring a little more out of their lenders and private investors. Williams

raised $1.4 billion by selling a three-year private placement Thursday. Also, outfits like Winstar, which received $500 million in financing commitments from supplier Cisco and $2 billion from Lucent, have the option to

tap more of that cash to get by.

But don't count on the white knights. As we've seen so far, the more stable telcos such as

Qwest

(Q)

and AT&T are

grabbing distressed assets for cheap and shunning liabilities -- so mergers and buyouts aren't likely.

Of course, building networks takes enormous upfront costs and, as the script goes, somewhere down the line, sales of phone service or Net access eventually contribute to cash for loan payments and the like. But as some observers point out, given the enabling generosity of the investment community during the late '90s, a few hundred too many service providers hit the market with similar game plans. And now, as the credit bills are coming on heavy, sales are still disproportionately light.

For some companies, the total cost of debt payments this year exceeds cash flow, or money these companies have been able to generate after initial expenses. In other words, the companies that have maxed out their credit cards are getting a bill that's greater than their bank balance.

More Problems

And with no new sources of capital available from stock sales or additional willing creditors, this scenario points to many more PSINets ahead.

It's not all doom and gloom, however. Lehman's Suria sees a silver lining in Chapter 11. Once these telcos restructure their debt, they're freed from the pressure that took them down. If a company can emerge intact from a financial restructuring, conceivably it can run its operations on a lower cost basis, says Suria.

But ultimately, when debt comes knocking, the sector starts rocking. The potential collapse of Winstar, for example, wouldn't just hurt its stockholders and less-secured creditors. It would also sting its partners, including Williams.

According to a

Merrill Lynch

note to clients Tuesday, Winstar owes Williams $92 million in annual network-capacity payments, which represents about 7% of Williams' projected 2001 revenue. (Merrill rates Williams accumulate and was one of the underwriters for its 1999 IPO. Merrill rates Winstar a buy and while it has done no underwriting for the firm, Merrill has a $16.5 million loan available to Winstar, according to a December

Securities and Exchange Commission

filing.)

Clearly, some companies will be able to survive and even dodge the falling telcos in this shakeout, but there's little sense that we're nearing the end of what some call a necessary part of the cycle.