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Analysts Keeping Eyes on Fiber Optics Sector

Outlook: The industry's fate is uncertain as demand for data networks weakens and bankruptcy filings rise.

April 24, 2002|ELIZABETH DOUGLASS | TIMES STAFF WRITER

Continuing troubles in the telecommunications industry are sparking a new round of bankruptcy filings among the many network operators that are teetering on the edge of extinction, industry analysts said Tuesday.

Upstart Williams Communications Group Inc., which filed for bankruptcy protection Monday, is the latest victim among an army of fiber-optic network companies that have been devastated in the last year by a combination of falling prices, persistent overcapacity and crushing debt payments.

Several more network operators, among them Level 3 Communications Inc., Metromedia Fiber Network Inc., TyCom Ltd. and Broadwing Inc., are now widely considered candidates for bankruptcy protection, depending on their ability to appease their bankers and bondholders, said Scott Cleland, an analyst with Precursor Group in Washington.

The telecommunications industry as a whole has fallen so far that investors now wonder about the survival of giants such as WorldCom Inc., which carries the largest share of this country's Internet traffic, and grew to be a powerhouse through the purchase of MCI and other companies.

Not long ago, the nation's telecommunications companies were counted among Wall Street's favorites, considered key to a growing economy coursing with ever-growing amounts of data and Internet traffic.

The companies and their investors never contemplated an economy so weak that the newly built networks would be begging for data.

But today, the companies are in deep trouble. A recent report by Carter Pate of PricewaterhouseCoopers estimated that there would be about 200 bankruptcy filings this year among publicly traded firms, and that telecommunications companies "will represent a significant share of those companies."

Pate said many in the communications industry argued with him over his downbeat projection when it was released at the start of the year. Now, however, it seems clear that telecommunications companies are "not out of the woods yet," Pate said.

Among the many fiber-network companies now in Bankruptcy Court are Global Crossing Ltd., 360 Networks Inc. of Canada, Flag Telecom Holdings Ltd., ESpire Communications Inc. and others.

Analysts say that the companies most vulnerable to bankruptcy filings now are those that spent heavily to build fiber-optic networks and have few other sources of income. Their primary source of income is the sale of capacity on their respective data networks. With that revenue plummeting and no substantial substitute for income, debt payments become increasingly difficult to manage.

Recently, Level 3 planned to sell its few non-communications assets to raise cash and pay down debt. Level 3 reported better-than-expected first-quarter results Tuesday, but with red ink still flowing, the relative good news has not convinced Wall Street of the company's staying power.

Metromedia Fiber, meanwhile, said Tuesday that it expects to restate its 2001 results to a loss of up to $5.36 billion because its accountants refused to sign off on the company's audit. The White Plains, N.Y.-based company, which faces possible delisting from Nasdaq, also defaulted last week on a $30-million interest payment to Verizon Communications Inc. and may be considered a bankruptcy filing candidate.

"Those pure-plays have it tough, because fiber is a monopolizing technology, and fiber optic technology advances just undermine competition," Precursor's Cleland said.

With each improvement to the technology, companies can send ever-more data down a single strand of glass--a phenomenon that will continue to exacerbate the industry's overcapacity troubles even if network construction stayed dormant for years.

But even the most distressed pure-play companies still hope to survive--if they can restructure their crushing debt load. Tulsa, Okla.-based Williams said it has struck a deal with its principal creditors, lenders and bondholders to reduce the company's debt by about $6 billion.

Industry watchers, however, have their doubts. "It'll take some magic and pixie dust to survive," Cleland said. "We're going to see more and more carnage."

Analysts say that companies like Qwest Communications International Inc., by contrast, have a much better chance of survival because they have steady income from other sources. Qwest has a profitable local phone service business, formerly known as U.S. West. Analysts say Qwest also can raise funds by selling its directory and other businesses, raising up to $10 billion altogether.

Such moves may buy Qwest and others enough time to make it through the industry's meltdown. But it's not a guarantee.

"WorldCom is trading under $5 ... who would have thought," said Vik Grover, a telecommunications analyst at Kaufman Bros. "Wall Street has walked away from this sector ... and it's not over."

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