Falling Telecom Issues Lead New Slump in Junk Bonds
It isn’t just U.S. stock investors hanging up on telecommunications companies. Quite a few junk bond investors are unplugging as well.
The plunge in many of the companies’ stocks is now reinfecting the U.S. junk bond market, where many up-and-coming telecom firms have raised billions in capital in recent years.
Telecom junk bond values had slumped in November and December amid the first signs of the U.S. economic slowdown. But the bonds rebounded in January as the Federal Reserve began to cut interest rates.
Now, amid deepening woes for some high-profile telecom services providers, the bonds are sinking again.
“It very much feels as though the rug is being pulled out from under the telcos,” said Kevin Perry, senior vice president at Back Bay Advisors in Boston, where he helps manage more than $5 billion.
The 9.13% bonds of Global Crossing maturing in 2006 were trading at $95 per $100 face value in October. The price tumbled to $83 per $100 in late November, then rocketed to $102 in January.
Now, the price has fallen to $88.75, according to Bloomberg News data.
Some bonds have suffered much deeper losses. Winstar Communications’ 12.75%, 10-year notes have plummeted to $6 per $100 face value this week, down from $83 in January, amid fears the company may run out of cash, leaving bond owners unpaid.
Telecom bonds have accounted for as much as one-third of what J.P. Morgan Chase says is a $722-billion junk bond market.
But the glut of telecom competitors that arose in the late-1990s--willingly financed by yield-hungry junk bond investors--has led to cutthroat competition. The slowing economy has worsened the situation, and now-frozen capital markets mean the weak companies that are most in need of capital can’t find investors to fund them.
“You’ve seen companies very quickly spin out of control,” said Jonathan Savas, director of high-yield telecommunications research at Merrill Lynch & Co.
It’s not just the usual warnings of lower-than-expected earnings or revenues that are doing telecom bonds in. This week alone, Winstar, PSINet Inc. and Rhythms NetConnections Inc., among other telecom firms, have either delayed filing annual reports or said their auditors are nervous about their ability to survive.
“If a company can never access the equity or debt markets again, it’s easy to assume it may not be able to survive, so it’s lights out for the stock, and in some cases for the bonds,” said Brian Hessel, who helps manage $3 billion of junk bonds for J&W; Seligman & Co. in New York.
“When the underlying equities fall off significantly, it gets people nervous that equity markets may know more about these companies than the high-yield market does,” Hessel said.
Global Crossing’s stock (ticker symbol: GX) fell to $9.65 on the New York Stock Exchange on Wednesday, down 45 cents for the day and down from $24 in mid-January.
Winstar shares (WCII) were at 41 cents Wednesday on Nasdaq, down from $22 in mid-January.
Back Bay Advisors’ Perry attributed much of the reversal in telecom junk bonds to mutual funds. He said they account for more than one-half of junk bond trading in any given period, though their funds hold just one-seventh of the outstanding bonds.
The funds, in turn, are often at the mercy of investors who try to time junk bond market swings, much like other investors try to time the stock market. Some junk funds can quickly enjoy large cash inflows from investors--or suffer large cash outflows.
Overall, the slide in junk bond values since January has sent yields on the average bond surging. A KDP Investment Advisors index of 100 junk issues now yields 11.21%, up from 10.61% in mid-March.
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Down Again
Prices of telecom company junk bonds, such as those issued by Global Crossing, have been sinking again in recent weeks after a January rally.
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Global Crossing 9.13% bonds maturing in 2006, price per $100 face value, weekly closes and latest
Wednesday: $88.75
Source: Bloomberg News
