ANALYSTS EXPRESS CAUTIOUS OPTIMISM ABOUT CLEC FINANCES
While CLEC industry is far from strong overall, upbeat news from McLeod and XO Communications shows CLECs with good management and business plans are persevering, analysts said Fri. McLeod announced bond offering and better-than-expected financial expectations Thurs. while XO announced Fri. it is selling $450 million of 5.75% convertible subordinated notes in private placement. Lehman Bros. analyst Daniel Zito said successful market transactions “should alleviate some pressure on the better names which have been cast away with everything else in the sector downdraft.” It shows “funding is still available at reasonable terms for the better management teams,” he said.
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Credit Suisse First Boston reiterated its strong buy rating for McLeod. Analysts Mark Kastan and John Doughty said McLeod’s proposed offering of $450 million of senior notes was “modest positive” given fact that company already was fully funded under current business plan. However, it’s very good news for CLEC sector “in light of ongoing investor concerns regarding access to capital.”. Credit Suisse also repeated strong buy rating for Winstar in report issued Thurs., citing company’s close last month on $270 million in private equity investment and its “very strong” 3rd-quarter results that surpassed analysts’ forecasts.
Lehman Bros. Zito warned, however, that good news applied only to “premier companies” such as McLeod, Time Warner, XO, WinStar. “ We would continue to avoid those names that are not funded at least through 2001 and lack a deep pocketed and willing parent,” Zito said. He said Lehman also was “wary of several subsectors that have bounced with the group -- namely, the DSL and building-centric players.” Successful deals by McLeod and XO don’t mean “capital markets are there for all,” Zito said. Analysts said investors were looking for companies with strong management and good strategies. There aren’t enough “quality issues” to support investors with capital to spend, Zito said: “We do not believe second and third tier carriers with debt at or near distressed levels will be able to access the markets for the foreseeable future.”
Meanwhile, GTC Telecom, also considered sturdy player by Wall St., announced Fri. it expected in its fiscal 4th quarter ending June 30 to either break even or see profit for first time. Company also predicted it would post net revenue of $15 million for fiscal year 2001, up from $4.7 million in fiscal 2000. Assuming break-even or profitability in 4th quarter, GTC said it expected fiscal 2001 net loss of 12-14 cents per share, compared with 42 cents year earlier.
Other CLECs continued to face bad news: (1) FairPoint Communications continued to scale back its FairPoint Solutions, CLEC unit that serves business customers in small urban markets adjacent to FairPoint’s rural telcos. FairPoint announced Fri. it cut back Solutions expansion plans, dropped 360 employees through “consolidation,” closed 8 district offices. (2) BTI Telecom withdrew $125 million IPO because of “unfavorable market conditions.”