We’ve all watched the meltdown in the financial sector over the past few weeks with awe. All these household names, giants of stability, the very definition of wealth, all seemingly helpless against a tide of bad debt of their own creation. But what does it really mean for the internet and all the companies that hold it together?
Well, slowdowns eventually affect sales of course, but other than that the effect is limited to those who need access to the debt markets. What does TW Telecom care about the debt markets right now? They’re cashflow positive and have no maturities until 2013. What about Equinix? 2012. Global Crossing? 2012 again. Internap? Abovenet? Nothing to see there. Good thing too, if AT&T can’t access the markets you can be sure nobody else in the sector can either. Except of course Zayo which seems to have an almost magical touch these days.
Of course, there are some who need to access the credit markets a bit sooner. The easiest to spot is Level 3, which has $362M due next September, then slugs of $514 and $374 due before mid 2010. But they are sitting on $790M in unrestricted cash and say they will be generating positive cashflow from here on out. So they will pay the $362 in cash and can wait a while if necessary before worrying about the rest. They’ve always had backers with deep pockets but such money would be expensive and I’m sure they’d rather wait. If the liquidity crisis lasts longer than that, we’ve got bigger problems to worry about. It mainly acts to force Level 3 into a laser-like focus on cashflow for the near future.
The remaining effect is simply to reduce the potential for M&A. If one can’t raise money, one can only use cash on hand or issue more stock. And in the face of uncertainty, few will want to take chances anyway. On the other hand, those who have the funding and the stones for it are finding bargains out there.
So I guess most of the sector just gets to watch and hope the fire doesn’t spread so far as to do serious damage to sales. That and sell services, light more fiber, and deliver more data. Despite everything, internet traffic is still going to grow from here and the market for fiber and data services doesn’t have a huge supply imbalance this time. It’s a nice tailwind to have whether the markets recognize it yet or not.
Anyhow, that’s my opinion. What’s yours?
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What about a company like XO that’s far closer to running out of cash? I suppose Icahn can always arrange a financing, but it’s gotta hurt to do so now…
Or take Fairpoint Communications. From the WSJ: http://online.wsj.com/article/SB122289779555295783.html?mod=googlenews_wsj
I’d say that XO’s recent refinancing still leaves them in decent shape for a while now. As for Fairpoint, I haven’t followed their story too closely, I’ll look into it.
lvlt has said that they are going to pay cash for the 362 due next year. with those bonds trading at a pretty big discount you have to wonder if they are buying them now to save a few bucks. if so, i think that’s a big boost of confidence in terms of mgts thoughts around cash flow generation over the next year or so. if not, you know they are hoarding cash for “just in case” scenarios.
I don’t expect this to happen & certainly would not like it to happen , however, if the economy worsens,Lvlt has another option. It is not a solution, but could put them in a better borrowing position .
Mr Crowe made an oblique reference to it in his last presentation .
LVLT could choose to run the co as Leaucadia did Wiltel–not on a permanent basis ,but as long as deemed necessary . LVLT has about 1.5 bil in annual operating expenses . About 2/3 of these relate to new business . LVLT could forfeit its large organic growth plans & cut operating expenses sufficiently to create substantial additional F/C/F . Thereby creating a larger safety net for a potential lender.
They also have a few more assets to sell, should the need arise. I wonder if they will ever get rid of the coal mines. Certainly they have options, and a historical record of knowing how to use them.
Many companies in the fiber world will tighten their cash on cash payback periods. Many will turn down business, even if 3-5 year contracts, unless cash on cash as short as 6 or 8 months. They simply will need to do this.
The result is (a) prices will be stronger and (b) some companies will grow a ton faster than others. That is, growth rates of some will be dampened by them not being able to take good business. Others, who are in a position to accept 10+ months of cash on cash payback, will be the beneficiaries.
Cash Is King. as times get tougher, LVLT must cut back on all expenses including salaries and bonuses, forget about any large organic growth plans and put a sign on Crowe’s desk that reads:
“Survival Is All There Is”
So who other than Zayo has the cash to outgrow the sector in times like these? TW Telecom? Global Crossing?
I stumbled upon this doing some due diligence on another stock. If you go to Bloomberg and pull up the Level 3 2014 bonds, the 9.25s. Someone added 154,000 bonds to their 30,000 position. That is not to say that they did not add more of other bonds but he spent money buying AT LEAST that issue.
Who is that buyer, BRK.B’s General Re division which is invested by Warren Buffet.
based on today’s prices, that is $138M dollar investment. Arguably, the bond mkt is in a tougher spot today.
Bill Miller and Mason Hawkins are still holding on to LVLT, this must mean something!
Miller is a net seller from the people I talk with – if that one rallies I’d expect him to sell some. Mason is in Buffet’s camp.
Eric S, I don’t use bloomberg.com often but I was unable to find the 9.25 2014 bonds there. Do you have a link I could start from, or is this coming from a paid subscription?
Bloomberg.com is a free site that is slimmed down from the pricey software application. I took a screen shot of the page this morning and will send you a copy Rob. The 2014 bonds are important given that they are the most liquid of Level 3’s bonds. If anyone else would like one, let me know.
What evidence do you have that Bill Miller is selling LVLT?: I have seen nothing like that in his funds’ reports.
He has not sold anything yet(through 9/30) and at this point I would not expect him to. My comment was obviously when Level 3’s stock was in a different place(relative to the mkt). The people I have talked with suggested that if financials continued to underperform Bill was likely to ease off some of his outsized bets(see his AMZN holding) off to pick up more finl exposure. With financials relatively rallying from that point in time, neither side of that trade makes sense.