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Note to broadband and telecommunications companies seeking financing: Execute, execute, execute those business plans.
The difficult climate for telecom providers seeking capital has improved slightly since the first of the year, but only for those companies that can demonstrate they know what they're doing.
In the public arena, CLEC Time Warner Telecom Inc. tapped a supposedly weak market for telecom stocks by raising $483 million from a secondary offering of common shares on Jan. 25, after boosting the offering to 6.5 million shares from the originally contemplated 4.4 million. The Littleton, Colorado-based company added another $400 million through the private sale of 10.13 percent, 10-year senior notes, taking advantage of the growing appetite for junk bonds carrying less-than-investment grade credit ratings.
XO Communications Inc. recently sold $517 million in 5.75 percent notes due 2009 and convertible into XO common stock at $25.54 per share. XO will use the money to expand its existing networks and services, develop and acquire additional networks and services and fund working capital.
Fiber-optic equipment maker Ciena Corp., whose common shares have tumbled nearly 50 percent from their highs of last fall, nevertheless last month raised $1.5 billion to fund acquisitions and operations. Maryland-based Ciena sold 11 million shares of common stock at $83.50 a share and $600 million in notes due in 2008. The notes are convertible into stock for about $104.38 a share.
All three companies were taking advantage of lower interest rates and investors' record appetites for lower-rated corporate debt in light of a virtually nonexistent market for initial public stock offerings.
For companies that are building networks, a 100-basis point reduction in interest rates can shave as much as 10 percent off the amount of interest they pay and help stretch out their available cash, says Tom Friedberg, telecommunications analyst at Tucker, Anthony Cleary, Gull.
It remains a selective capital market, closed to all but those companies with proven track records. For those companies that have yet to sell public equity, the same is true.
"In today's difficult financing market, we seek companies with viable futures, capital efficiencies and achievable build-out strategies," said Andy Rush, chairman of DLJ Global Communications Partners.
On the private side, "there's plenty of capital out there. The good teams that have executed on their plans--they're being financed again," says Rand Lewis, associate at Centennial Ventures, a Denver-based venture capital company focused on the telecommunications industry.
For telecom service provider executives in search of financing, the last six months have been almost draconian. John Kane, chief executive officer at Englewood, Colo.-based Telseon Inc., a Gigabit Ethernet over fiber provider, started looking for financing last summer. His hopes for a combined private equity/high yield debt sale were dashed as the floor fell out of the financial markets.
Kane says the company tried to keep investors interested but really didn't try to close on the third round funding until the end of the year.
"Our sense was that there was no stability by which investors could base their decision on. They were sitting on the sidelines with piles of capital waiting for the bottom," Kane says.
Telseon raised $100 million in private equity and secured another $75 million in vendor lease financing. Having financial heavy hitters like DLJ Global Communications Partners and repeat investor Goldman Sachs Group involved in the funding round helped, Kane says. But even smaller investors stepped up the amount of scrutiny known as due diligence before opting in.
"I'm still trying to heal from the wounds and the extractions of flesh and other sharp objects that I've been prodded and probed with during the due diligence process," Kane says. To date, Telseon has raised $261 million in private capital, and has financing in place to double the size of its networks under its current business plan and become cash flow positive sometime late next year, Kane says.
Private equity investors who still have capital that they want to put to work want to be sure the companies they've invested in previously are making progress, Centennial Venture's Lewis says. "If they haven't achieved what they said they were going to achieve a year ago, they don't have the credibility to raise more money."
With only three initial public offerings taking place in January, investors have jumped on corporate bond sales that totaled more than $12 billion through Jan. 25, according to Bloomberg News.
American Tower Corp., the largest owner of broadcast-transmission towers, almost tripled its planned $350 million bond sale because of demand. It sold $1 billion 9.3758 percent notes due in 2009.
Further bond sales are likely. 360networks Inc. filed a shelf registration with the Securities and Exchange Commission, signaling its intent to sell up to $3 billion of debt, preferred shares, warrants and stock purchase units.
Qwest Communications International Inc.'s financing arm sold $3 billion in new bonds earlier this month in a private transaction.
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