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December 13, 2001 — (WEB HOST INDUSTRY REVIEW) — 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).
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“Fitch expects going into 2002 that operating conditions for the industry
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remain weak,” said analyst John Culver. “A moderate rebound is poised to
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unfold in the second half of the year, however, during the year Fitch
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expects rating activity to continue due to the possible resolution of
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Negative Rating Outlooks, as well as the completion of announced M&A
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activity. Also, competitive pressures on the investment grade carriers have
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abated moderately as many of the emerging carriers have struggled and many
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are in bankruptcy.”
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The year 2001 saw significant downward pressure on ratings from Fitch, with
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the most pronounced activity in the non- investment grade sector of the
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telecom universe, but the investment grade carriers were not immune either.
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The downward pressures for the investment grade carriers arose from a
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variety of factors, including continued erosion of long distance voice
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revenues, the lingering effects of M&A activity initiated in the prior year
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and the funding of growth initiatives.
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A combination of factors contributed to downward rating actions. For
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non-investment grade credits, emerging carriers such as Williams
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Communications and Focal Communications were either downgraded, or ended up
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in default, such as Rhythms NetConnections, Winstar, and XO Communications.
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Positive rating activity in the entire telecom sector in the form of
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upgrades, Rating Watch Positive designations or Positive Rating Outlooks
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(none) were few and far between and were due solely to acquisitions of
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weaker credits by stronger ones.
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Fitch expects long distance operators to continue to be challenged by the
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need to drive sufficient growth in the data business to offset the
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expectation for continued declines in voice service pricing. Pricing
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pressures are expected to abate somewhat, as emerging carriers in this
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sector have struggled, as customer mixes have shifted to more
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customer-favorable pricing packages and as the Regional Bell Operating
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Companies are in the near term unlikely to compete on price as they get long
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distance approvals. Substitution from the Internet, e-mail and wireless
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services is expected to continue in the 800 calling area and for voice
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communications, although high volume users of these services have already
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switched their usage patterns. The sluggish economy, in addition to slowing
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the demand for services, caused corporations to slash spending in a number
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of areas, including the telecom- impacting information technology area. The
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spending cuts have to an extent delayed the adoption of higher-end data
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services for which carriers had expected high growth rates.
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Major long distance operators have responded to the challenges of 2001 and
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prospects for 2002 by aggressively reducing capital expenditures, which
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could allow for some balance sheet improvements. In 2002, Fitch expects
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EBITDA from voice services to decline at a rate in the high-single digit to
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mid-teen range in 2002. EBITDA from data services could potentially offset
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the voice EBITDA erosion and, on a combined basis, allow for either flat or
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modestly positive EBITDA growth in 2002.
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The operating fundamentals of the wireless industry are quite strong and are
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expected to continue to be so in 2002. Demand growth is expected to be
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healthy, as industry penetration rates are lower than in European markets.
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However, higher penetration introduces greater risk, as the best customer
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segments have been highly penetrated, leaving the carriers to pursue more
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marginal customers.
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While revenues per minute are expected to decline, continued rapid growth in
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minutes of use per customer combined with moderate growth in data revenues
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are expected to lead to relatively stable average revenues per user (ARPU).
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Access to adequate spectrum is a long-term industry concern, but technology
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upgrades combined with spectrum from the NextWave settlement (assuming it
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gets the requisite approvals) could strongly position the industry for the
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next several years.
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Industry consolidation is an unknown variable that Fitch feels could have
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some negative consequences on some operators’ credit profiles in the short
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term but improve long-term competitive positions. The opportunities for
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consolidation were boosted by a significant order of magnitude as a result
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of a Nov. 2001 decision by the Federal Communications Commission. The
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decision immediately raised the amount of spectrum carriers could own in a
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market and scrapped limits altogether in 2003.
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For most of the major wireless operators, Fitch expects 2002 EBITDA to grow
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at double-digit rates as all carriers are expected to have funding needs due
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to technology migrations, possible NextWave spectrum payments and to fund
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continued growth.
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For the local exchange carriers, EBITDA growth slowed in 2001 and companies
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shifted their capital programs downward in response to lower growth in
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demand, and somewhat lower spending in growth areas. Such cutbacks are
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expected to come into full effect in 2002 and provide for balance sheet
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improvements. On an overall basis, Fitch expects EBITDA growth for the Bell
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companies to be in the mid-single digit range in 2002.
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For the RBOCs, areas of operational focus include the continuation of the
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Section 271 interLATA long distance application process and the continued
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rollout of their data offerings, including DSL. In terms of long distance
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offerings, Verizon Communications and SBC Communications are ahead of
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BellSouth Corp. and Qwest Communications having had applications approved
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for several states. Nevertheless, the latter two companies are well along in
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the process, with BellSouth likely to get approval in two states by the end
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of the year and Qwest to see significant activity in 2002. Although clearly
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not as profitable as it once was, the long distance business will enable the
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RBOCs to compete effectively in the residential and small business markets
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against their less constrained competitors.
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For the RBOCs, competition from competitive local exchange carriers has
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abated to some degree due to the wave of CLEC bankruptcies and
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restructurings. This will continue into 2002. Although the future of the
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surviving, recapitalized CLECs is far from clear, there is the longer- term
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potential that the remaining CLECs will emerge as stronger competitors due
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to their shored up balance sheets and from the wholesale elimination of the
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weakest competitors.
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Fitch said that further industry consolidation is an unknown for 2002, but
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conditions could be particularly favorable in light of the Republican
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administration, the composition of the FCC, the recent decision by the FCC
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to remove wireless license spectrum caps fully in 2003 and continued
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progress on the part of the Regional Bell Operating Companies to get their
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Section 271 long distance applications approved. In addition to M&A
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activity, rural LECs continue to bulk up by acquiring access lines in rural
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areas from the RBOCs, as well as by purchasing smaller carriers.
