Commentary on The Telecom Problem

These comments are arranged in reverse chronological order (most recent are first):

[UPDATED June 15, 2002] I’m updating my view on the long-term future of the telecom sector. Because of the extreme levels of debt that preclude any significant new investment, there are three ways out: 1) a massive government bailout, 2) rescue of individual companies by white knights who buy a controlling interest in the stock and much of the debt for pennies on the dollar so that the debt can be effectively cancelled at a fraction of its par value, or 3) the existing debt holders agree to take a dramatic haircut and exchange their old debt for a new debt at pennies on the dollar. The only solution is to eliminate the bulk of the debt without crippling the operations of the company. Once the debt is reduced, the company can get a much better credit rating and then borrow new money at a much lower interest rate. Selling off assets (like Qwest (Q) is trying to do with its directory publishing business), is a very bad idea, especially for assets which are cash cows. It remains to be seen how this plays out. I do expect that a number of the telecom service providers can limp along and actually recover a little as the economy recovers, but their cash flow will be dedicated to maintaining and only marginally enhancing the existing network infrastructure. Basically, they can’t borrow very much if any new money to finance ‘new’ networks to support things like widespread implementation of true broadband, telemedicine, and terror-proof redundancy.

[UPDATED April 10, 2002] My latest thought on the telecom sector is that capital investment will be limited to cash flow and cash for the coming year. Even the best of the telecoms cannot increase their debt load AT ALL. They will continue to limp along for another year or two, but the longer-term will bring a massive government bailout to free these critical companies from their dead-end debt loads and to infuse new capital. Think $100-750 BILLION over ten years. That said, there could be some recovery over the coming year as the economic recovery picks up speed, especially in the corporate sector. An economic recovery will raise the telecoms' cash flow and that will allow them to modestly raise their capital spending. Telecom equipment stocks will be rather volatile over the coming year and may provide some interesting trading opportunities as the flow of news bounces between optimism and depression.

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Updated: February 05, 2006 08:00:53 PM -0500