Dec, 2001 : Telecoms Likely to Rebound in Mid-2002, Fitch Predicts

📅 December 13, 2001 - As 2001 comes to a close, credit profiles in the US telecom sector remain pressured. Yet, there is relief ahead assuming some form of economic recovery, according to rating agency Fitch (bankwatch.com).

"Fitch expects going into 2002 that operating conditions for the industryremain weak," said analyst John Culver. "A moderate rebound is poised tounfold in the second half of the year, however, during the year Fitchexpects rating activity to continue due to the possible resolution ofNegative Rating Outlooks, as well as the completion of announced M&Aactivity. Also, competitive pressures on the investment grade carriers haveabated moderately as many of the emerging carriers have struggled and manyare in bankruptcy."
The year 2001 saw significant downward pressure on ratings from Fitch, withthe most pronounced activity in the non- investment grade sector of thetelecom universe, but the investment grade carriers were not immune either.The downward pressures for the investment grade carriers arose from avariety of factors, including continued erosion of long distance voicerevenues, the lingering effects of M&A activity initiated in the prior yearand the funding of growth initiatives.
A combination of factors contributed to downward rating actions. Fornon-investment grade credits, emerging carriers such as WilliamsCommunications and Focal Communications were either downgraded, or ended upin default, such as Rhythms NetConnections, Winstar, and XO Communications.Positive rating activity in the entire telecom sector in the form ofupgrades, Rating Watch Positive designations or Positive Rating Outlooks(none) were few and far between and were due solely to acquisitions ofweaker credits by stronger ones.
Fitch expects long distance operators to continue to be challenged by theneed to drive sufficient growth in the data business to offset theexpectation for continued declines in voice service pricing. Pricingpressures are expected to abate somewhat, as emerging carriers in thissector have struggled, as customer mixes have shifted to morecustomer-favorable pricing packages and as the Regional Bell OperatingCompanies are in the near term unlikely to compete on price as they get longdistance approvals. Substitution from the Internet, e-mail and wirelessservices is expected to continue in the 800 calling area and for voicecommunications, although high volume users of these services have alreadyswitched their usage patterns. The sluggish economy, in addition to slowingthe demand for services, caused corporations to slash spending in a numberof areas, including the telecom- impacting information technology area. Thespending cuts have to an extent delayed the adoption of higher-end dataservices for which carriers had expected high growth rates.
Major long distance operators have responded to the challenges of 2001 andprospects for 2002 by aggressively reducing capital expenditures, whichcould allow for some balance sheet improvements. In 2002, Fitch expectsEBITDA from voice services to decline at a rate in the high-single digit tomid-teen range in 2002. EBITDA from data services could potentially offsetthe voice EBITDA erosion and, on a combined basis, allow for either flat ormodestly positive EBITDA growth in 2002.
The operating fundamentals of the wireless industry are quite strong and areexpected to continue to be so in 2002. Demand growth is expected to behealthy, as industry penetration rates are lower than in European markets.However, higher penetration introduces greater risk, as the best customersegments have been highly penetrated, leaving the carriers to pursue moremarginal customers.
While revenues per minute are expected to decline, continued rapid growth inminutes of use per customer combined with moderate growth in data revenuesare expected to lead to relatively stable average revenues per user (ARPU).Access to adequate spectrum is a long-term industry concern, but technologyupgrades combined with spectrum from the NextWave settlement (assuming itgets the requisite approvals) could strongly position the industry for thenext several years.
Industry consolidation is an unknown variable that Fitch feels could havesome negative consequences on some operators' credit profiles in the shortterm but improve long-term competitive positions. The opportunities forconsolidation were boosted by a significant order of magnitude as a resultof a Nov. 2001 decision by the Federal Communications Commission. Thedecision immediately raised the amount of spectrum carriers could own in amarket and scrapped limits altogether in 2003.
For most of the major wireless operators, Fitch expects 2002 EBITDA to growat double-digit rates as all carriers are expected to have funding needs dueto technology migrations, possible NextWave spectrum payments and to fundcontinued growth.
For the local exchange carriers, EBITDA growth slowed in 2001 and companiesshifted their capital programs downward in response to lower growth indemand, and somewhat lower spending in growth areas. Such cutbacks areexpected to come into full effect in 2002 and provide for balance sheetimprovements. On an overall basis, Fitch expects EBITDA growth for the Bellcompanies to be in the mid-single digit range in 2002.
For the RBOCs, areas of operational focus include the continuation of theSection 271 interLATA long distance application process and the continuedrollout of their data offerings, including DSL. In terms of long distanceofferings, Verizon Communications and SBC Communications are ahead ofBellSouth Corp. and Qwest Communications having had applications approvedfor several states. Nevertheless, the latter two companies are well along inthe process, with BellSouth likely to get approval in two states by the endof the year and Qwest to see significant activity in 2002. Although clearlynot as profitable as it once was, the long distance business will enable theRBOCs to compete effectively in the residential and small business marketsagainst their less constrained competitors.
For the RBOCs, competition from competitive local exchange carriers hasabated to some degree due to the wave of CLEC bankruptcies andrestructurings. This will continue into 2002. Although the future of thesurviving, recapitalized CLECs is far from clear, there is the longer- termpotential that the remaining CLECs will emerge as stronger competitors dueto their shored up balance sheets and from the wholesale elimination of theweakest competitors.
Fitch said that further industry consolidation is an unknown for 2002, butconditions could be particularly favorable in light of the Republicanadministration, the composition of the FCC, the recent decision by the FCCto remove wireless license spectrum caps fully in 2003 and continuedprogress on the part of the Regional Bell Operating Companies to get theirSection 271 long distance applications approved. In addition to M&Aactivity, rural LECs continue to bulk up by acquiring access lines in ruralareas from the RBOCs, as well as by purchasing smaller carriers.