Investors Returning to Telecom-Sector Bonds
Some bond investors who wrote off the telecommunications sector over the summer have swarmed back in recently, betting that cost cutting and debt reduction will allow more of the industry’s troubled companies to survive.
Yet analysts warn that true bond bargains in the sector are harder to find as yields decline.
Over the last month, the yield premium that telecom company bonds pay over U.S. Treasuries has narrowed sharply as investors have bid up the prices of the bonds.
For example, on Oct. 8, the price of Sprint Capital Corp. bonds maturing in 2028 and paying an annual interest coupon of 6.88% was quoted at $53.96 per $100 face value. The effective annualized yield on the bonds was 13.16%, or 8.46 percentage points above the yield on 30-year Treasury bonds.
On Monday the Sprint Capital bonds were quoted at $68.46 per $100 face value, with a yield of 10.41%, or 5.62 percentage points above the 30-year T-bond.
Similarly, the price of AT&T; Wireless bonds maturing in 2011 and paying a 7.88% annual interest coupon has zoomed from $73.59 per $100 face value on Oct. 8 to $91.57 as of Monday.
The yield on the AT&T; Wireless bonds has fallen from 13.16% to 9.35% in that period.
The turnaround in the telecom sector has been stoked in part by the stock market’s rebound since early October. As many telecom stocks have resurged, investors have become more confident about the companies’ bonds.
AT&T; Wireless shares have jumped from $3.65 on Oct. 8 to $6.16 on Monday.
“It looked like people wanted to buy some of this stuff [telecom bonds] and were waiting for some neutral sign rather than bad news,” said Tom Parker, high-yield bond portfolio manager at Barclays Global Investors.
He said solid third-quarter earnings reports from Sprint FON Group, AT&T; Wireless and other telecom firms helped revive interest in the bonds.
But credit-rating agencies are still cautious on the telecom sector, which has been racked by bankruptcies over the last two years because of extreme industry overcapacity.
Many of the surviving companies are trying to reduce expenses and lower their overall debt levels, but some analysts worry that companies are running out of opportunities to cut costs without hurting their businesses.
“I think we’ll continue to see capital expenditures revised downward, but there comes a point where if you revise it too much, it could affect the quality of the network,” said Bill Densmore, a Fitch Ratings analyst.
Standard & Poor’s, in a report on the sector last month, said business risks have increased for many companies as a sluggish economy adds to competitive pressures.
But bond research firm CreditSights Inc. said there is still room for gains in telecom bonds. “What is gaining traction with investors is the industry’s consistent efforts to reduce once-ambitious capital spending intentions and to scale back expansion plans,” CreditSights said.
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Bloomberg News was used in compiling this report.
