The Bank of England, that country's equivalent of the United States' Federal Reserve Bank, issued a report Thursday warning that billions of dollars in telecommunications debt poses a growing risk to world economic stability. In addition, many banks and investment firms are heavily exposed to a sector where financial returns lag expenditures, the bank said.
"Within the 'new economy,' the telecom sector presents a particular set of risks which have, on balance, increased" since June, the bank's December 2000 Financial Stability Review noted.
Many banks already have set limits on the amount of money they're providing to the telecom sector, with some "facing tough choices between risk and business relationships," the bank added.
The grumbling in the credit sector serves as a renewed warning for a telecommunications industry already caught between a heavy need for new and consistent funding and swiftly shrinking access to those funds.
Some of the newest companies hoping to provide data or local phone services in competition with the giants have already had to lay off staff, scale back expectations, or even file for bankruptcy protection. Large companies such as AT&T have accumulated tens of billions of dollars in debt and are seeing their borrowing costs soar and their stock prices decline partly on concerns about their ability to manage the debt.
While investors have been acutely aware of the issue in recent months, the Bank of England's warning shows that alarm bells are beginning to sound far from Wall Street.
Credit analysts in the United States say they aren't worried about the biggest companies defaulting, even though the debt levels are still growing. AT&T's debt has reached $62 billion, for example, a level roughly equivalent to the company's annual revenues.
For its part, WorldCom had nearly $4.3 billion in short-term debt and $18.7 billion in long-term debt as of Sept. 30. The company had total liabilities of about $40 billion, according to its quarterly balance sheet. Sprint had about $4.6 billion in debt at the end of its third quarter with approximately $23 billion in total liabilities.
Moody's Investor Service, a credit-rating firm, downgraded AT&T's corporate debt rating in mid-November and has the company on a watch list of companies facing another possible downgrade. Lower credit ratings can make it more difficult for companies to attract investors, or more costly for them to borrow.
AT&T's ratings are still considered "upper-medium-grade." Although slightly lower than Ma Bell's credit rating, WorldCom's rating was unchanged in 2000 and has a "stable" outlook, according to Moody's. Sprint has a lower "medium-grade" rating, which was unchanged this year, but Moody's maintains a "negative" outlook on Sprint's credit rating.
But those companies will still be able to access capital in even a hostile market, albeit at more costly rates, analysts said.
"The companies with high-quality credit will always be able to access the market," said Michael Weaver, an analyst with Fitch.
But those companies' access to increasingly scarce funds, combined with their insatiable need for capital for such things as network investments and so-called third-generation wireless spectrum licenses, could bode ill for the rest of the market, some analysts note.
As the economy begins to cool, banks and investors are providing less funding to companies. A more limited amount of capital will thus be available to companies looking for investment help. The more funding that goes to giant telecom providers--whether for new investments or to help pay off debts--the less funding other companies receive.
That's bad news for smaller network, communications and Internet companies, which badly need capital to expand and survive, but which are not as attractive borrowers as the telecom giants.
"There is limited market interest in (new companies) and other high-yield issues," Weaver said. "There's just not a lot of liquidity in the market."
Much of the pressure on the amount of funds available to companies across the economy will depend on what the U.S. Federal Reserve Bank does early next year to lower interest rates, if in fact it acts as many market-watchers are beginning to predict. But even if Federal Reserve Chairman Alan Greenspan does loosen the economic screws, venture capitalists and other investors appear less likely to go into a technology and communications market where many companies have shown their underlying fragility.
Some influential market watchers are calling on Greenspan and President-elect George W. Bush to put together an economic plan that will support this sector quickly, or face potentially wide-ranging negative consequences.
"Do they want growth driven by the information sector, or do they want a recession driven by the information sector?" asked Reed Hundt, a former chairman of the Federal Communications Commission who now serves as a communications venture capitalist. "Decisions have to be made."
News.com's Corey Grice contributed to this report.