Moody's starts downgrade review for most junk wireless companies on growth concerns

By Peter Heap

New York, June 21 - Moody's Investors Service put the ratings of the majority of U.S. high-yield wireless companies on review for possible downgrade and changed the outlook for the entire industry to negative because of concerns about the rate of future growth.

Recent announcements from Sprint PCS and two of its affiliates have renewed concern that the industry may be more mature than expected, Moody's said.

If that is the case, carriers will mostly win customers by taking them from competitors rather than be adding new subscribers.

And it comes at a time when wireless companies are investing in upgrading their networks and even the big investment-grade rated operators are using cash, Moody's said.

Referring to the Sprint PCS announcement, Moody's analysts Dennis Saputo and Marcus C. Jones said in a report Friday that "the reduction of subscriber growth estimates from the fastest growing carrier is a troubling sign that the market for wireless service in the US has decelerated sooner and more sharply than we have anticipated."

Over the past nine quarters, Sprint PCS led the industry in net subscriber additions in all quarters except the first quarter of 2001 and its affiliates have typically been among the industry leaders in incremental penetration gains, Moody's said.

So Sprint PCS' announcement it would add only 300,000 subscribers in the second quarter of 2002 and 10% to 15% fewer in the full year than guidance provided in February "is particularly troubling," the analysts said. The February guidance for 3 million net subscriber additions had already been reduced from 2002 net addition guidance of 3.6 to 3.7 million given in December 2001.

U.S. wireless growth has been rapid since the introduction of PCS competition in the mid-1990s, Moody's noted. Strong growth was expected to continue through the early years of this decade, based on the assumption that the U.S. would experience similar penetration rates as Western Europe where they are presently north of 70%.

That expectation was the main driver for continued capital investment in the sector and for the ratings that had been assigned, Moody' said.

However even before the latest concerns arose, subscriber growth slowed significantly in the second half of 2001.

"Continued strong growth and decent demand for new services available from the newer networks are critical to allow operators to reach the inflection point and start generating cash flow," the Moody's analysts said.

"We are becoming increasingly concerned about these prospects. Thus, in Moody's opinion, the risk profile of all wireless carriers has increased."

For speculative-grade carriers with weaker capital structures, the situation is more acute, Moody's added.

"Many of the business plans, particularly of the Sprint PCS affiliates, are predicated on the existence of a larger, more robust wireless market than is likely to occur," Saputo and Jones said.

For rural carriers, the expectation that the gap would be closed between the national penetration rate and the lower rates experienced in those rural markets is much less certain, they added.

And while Nextel Communications is less directly affected by accelerated maturity of the wireless marketplace because of its differentiated service offering targeted at the business market, ultimately the other national carriers will look to reignite their growth by targeting the Nextel markets, particularly after they have launched their upgraded networks, the analysts said.

While consolidation could alleviate the stress, it is uncertain when consolidation it may take place, if permitted at all, Moody's said.

However the rating agency said it does not anticipate that wireless investors will see the "extraordinary" capital losses suffered in other parts of the telecommunications industry such as CLECs and long-haul carriers. High barriers to entry, the substantial volume of revenue that the industry already generates and the absence of competitive threat from outside the industry provide protection.

Nonetheless, wireless does share the problems of over capacity, too many service providers and slower demand growth than anticipated.

Moody's it has already taken negative ratings actions on U.S. wireless companies, due in part to competitive concerns and doubts about growth rates.

Actions included lowering Cingular one notch to A3 with a negative outlook in November 2001, putting Verizon Wireless (currently A2) on review for possible downgrade in May 2002, cutting Sprint Corp. (parent of Sprint PCS) one notch to Baa3 with a negative outlook earlier in June, downgrading Voicestream (wholly owned by Deutsche Telekom, senior unsecured Baa1) two notches over the course of this year and lowering its outlook to negative and revising U.S. Cellular's outlook to negative in May.

Among junk issuers, American Cellular's senior implied was cut four notches to Caa1 in May, Nextel Communications was lowered one notch to B1 in May, NTELOS was lowered two notches to Caa1 in June and Western Wireless was cut 2 notches to B1 in March.

In response to its latest concerns, Moody's took the following actions Friday:

- Lowered the outlook for AT&T Wireless Services, Inc.'s (senior unsecured Baa2) to negative from stable;

- Lowered the outlook for Nextel Communications, Inc. (senior implied B1, unsecured B3) and Nextel Finance Co. (secured debt Ba3) to negative from stable;

- Put all Sprint PCS affiliates on review for downgrade (but not Sprint Corp.). Affected are AirGate PCS, Inc.'s 13.5% subordinated discount notes due 2009 at Caa1; Alamosa (Delaware), Inc.'s secured credit facility at B2, 12.875% senior discount notes due 2010, 12.5% senior notes due 2011 and 13.625% senior notes due 2011, all at Caa1; Horizon PCS, Inc.'s secured credit facility at B1, 14% senior discount notes due 2010 and 13.75% senior notes due 2011 at Caa1; iPCS, Inc.'s secured credit facility at B1 and 14% senior discount notes at Caa1; IWO Holdings, Inc.'s 14% senior notes due 2011 at Caa1; US Unwired Inc.'s secured credit facility at Ba3 and 13.375% subordinated discount notes due 2009 at B3 and Ubiquitel Operating Co.'s secured credit facility at B2 and 14% subordinated discount notes due 2010 at Caa1;

- Put Nextel Partners and Triton PCS on review for downgrade affecting Nextel Partners' secured credit facility at B1 and 14% senior discount notes due 2009, 11% senior notes due 2010 and 12.5% senior notes due 2009, all at B3, and Triton's secured credit facility at Ba3 and 11% subordinated discount notes due 2008, 9.375% subordinated notes due 2011 and 8.75% subordinated notes due 2011, all at B2;

- Put all rural cellular companies on review. Centennial Communications is already on review and reviews were begun on Dobson Communications Corp.'s 10.875% senior notes due 2010 at B3 and 12.25% exchangeable preferred stock and 13% exchangeable preferred stock at Caa2, Dobson Operating's secured credit facility at Ba3 and Dobson's Sygnet 12.25% senior notes due 2008 at B3; Rural Cellular Corp.'s secured credit facility at Ba3, 9.625% subordinated notes due 2008 and 9.75% subordinated notes due 2010 at B3, 11.375% senior exchangeable preferred stock due 2010 at Caa1 and 12.25% exchangeable preferred stock due 2011 at Caa2; and Western Wireless Corp.'s secured credit facility at B1 and 10.5% subordinated notes due 2006 and 10.5% subordinated notes due 2007 at B3.

Put Leap Wireless International, Inc. on review, noting that although the company appeals most to the least served segment of the current market place it has approximately $2 billion of debt outstanding, has not yet achieved positive EBITDA, and has substantial near-term amortization requirement. Affected ratings include its 12.5% senior notes due 2010 and 14.5% senior notes due 2010 at Caa2.

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