Slowing wireless subscriber growth is
doing more than forcing companies to rethink revenue forecasts
and scale back expansion plans. In many cases, it's putting
companies in peril of violating the terms of their loans.
Lucent Technologies and Nortel Networks were among the
first wireless companies to encounter this problem when
earlier this year they were forced to renegotiate covenants.
But now, according to Standard & Poor's most recent
industry report card for the telecom and cable industries, the
problem is widespread.
The ratings agency notes numerous instances of wireless
carriers violating or becoming in jeopardy of violating
covenants on credit arrangements. Besides unlimited local
calling provider Leap Wireless International, which already
has defaulted on its vendor credit facility, carriers at risk
include Sprint PCS affiliates and rural carriers.
The declining headroom appears against the backdrop of a
variety of well-documented industry challenges, including
slowing subscriber additions due to penetration exceeding 50
percent and a highly competitive environment. The high degree
of competition forces carriers to keep adding minutes to
buckets just to keep average revenue per user levels flat.
But those challenges aren't entirely limited to industry
dynamics. The economy has played a pivotal role, too.
The affiliates, the S&P report states, "have
increasingly faced a multitude of financial risks, ranging
from possible near-term financial maintenance covenant
violations to tightened liquidity." The $26 million
currently held by AirGate PCS, for example, doesn't appear to
provide "adequate cushion against execution risks."
As well, the carrier needs to beef up operating cash flow in
order to meet two leverage requirements in the first quarter
of 2003.
Alamosa Holdings amended its covenants in late September to
account for lower subscribers, lower operating cash flow and
higher debt. Even though Alamosa has rolled out more
competitive local calling plans to bolster growth, the ratings
agency views its $96 million cash cushion as insufficient.
Horizon PCS recently amended its covenants to allow for
lower operating cash flow but higher revenue. While relatively
insulated at least through 2003 by its $233 million cash
position, the agency notes the carrier has no immediate
free-cash-flow target.
Sprint affiliate iPCS, which was bought by AirGate, is
perhaps in the most precarious position. According to S&P,
it's in danger of violating covenants for minimum subscribers,
minimum revenue and maximum operating cash flow "in the
very near term."
UbiquiTel was downgraded earlier this month. S&P
believes the carrier has the potential to violate its minimum
subscriber covenant even though it modified its bank covenants
in July. US Unwired also was downgraded on concern over bank
covenants that tighten in 2003.
Rural carriers, meanwhile, face increased business risks
due to declining roaming revenue. This source of cash flow, in
the agency's determination, "has become increasingly
risky" due to national carriers teaming up in joint
ventures to expand coverage into rural areas. Dobson
Communications and Rural Cellular Corporation both are
cash-flow positive and increasing the number of roaming
minutes to offset potential revenue declines. Western
Wireless, however, has the potential to violate its
debt-to-operating-cash-flow covenant in 2003.
Among other regional players, Nextel Partners and Triton
PCS are doing well. S&P rates their outlook as
"stable," in contrast to the Sprint PCS affiliates,
which have a "negative" outlook.
National carriers are on better footing by virtue of their
size and better funding. All, except the highly leveraged
Nextel Communications, are rated as stable. Among them, the
two largest carriers, Verizon Wireless and Cingular Wireless,
have the highest ratings. Significantly, both are somewhat
protected by being part of larger integrated phone companies.