Fraction of 2005 Debt to be Retired through Asset Sales, Says Expert

The telecommunications industry must pay back a mountain of debt in a few years despite all the bankruptcy restructurings.

About $60 billion — one fifth of the industry’s $300 billion debt load — matures in 2005, said Ernst & Young Corporate Finance Managing Director Eric Carlson.

Since 1999, 74 companies defaulted on more than $112 billion in debt, he said Wednesday. The majority of 2005’s outstanding debt will be retired through debt restructurings, Carlson says. Most telcos are not generating profits.

Carlson predicts no more than 5 percent of the debt would be retired through asset sales.

During Wednesday’s ASCENT 2003 Spring Conference and Networking Center in Anaheim, Calif., Carlson moderated a panel on the sale of distressed assets.

“Momentum on the buy side is growing today,” said Steve Strong, managing partner with Telecom Asset Management, a firm bringing buyers and sellers together.

Strong added the deals are granular and often are complicated legally and financially.

He said there are thousands of buyers “fragmented globally,” including government agencies, universities, the financial sector and the media and entertainment industry.

The panelists, who also included Cogent Communications Inc. CEO Dave Schaeffer and Cantor Fitzgerald Telecom Services LLC Managing Director Brent Wilkins, said there will be continued pricing pressure and more industry consolidation.

No one ventured to speculate who would acquire whom and when that would happen.

The panelists had some advice for sellers: Management and creditors must be realistic about the value of the asset. Otherwise, they said, pricing it too high could risk alienating all interested bidders and the distressed asset may be worth significantly less in the future.

Cogent paid $9.5 million for the U.S. assets of bankrupt PSINet, but the company would have paid more earlier on, Schaeffer said. PSINet’s bank originally was asking for a minimum bid of $450 million, he said. By the time Cogent reached an agreement, PSINet’s assets were not valued as high as during the original bidding process because PSINet had a high churn rate and less money in the bank, Schaeffer said.