Wall Street West—Stock, Bondholders Flee as Global Crossing Struggles

0

Investors have very little tolerance for uncertainty in today’s capital markets, and they demonstrated that in spades last week by dumping the stock and bonds of Global Crossing Ltd.

Causing the uncertainty was Global Crossing’s announcement that it has once again named a new chief executive, its sixth in four years, and that it might merge with Asia Global Crossing Ltd., a majority-owned joint venture. (John Legere, president and CEO of Asia Global Crossing, replaces Tom Casey as CEO of Global Crossing.)

Beverly Hills financier Gary Winnick remains chairman and a major shareholder in the money-losing telecom company, which has 100,000 miles of cables girdling the globe.

Even before last week’s announcement, investors had largely abandoned the company, due to the overbuilt condition of the telecom industry.

Global Crossing’s stock closed at $1.45 a share on Oct. 3, and in the hours following the Oct. 4 announcement sank to $1.15 down from its all-time high of more than $60 in 2000.

Bondholders reacted even more severely. Global Crossing’s $9 billion in bonds traded prior to the announcement at around 40 cents per dollar of face value. After the announcement, they slumped to about 20 cents. Only three weeks ago, the bonds had been worth more than 50 cents on the dollar.

“The market is telling you there will be an event here (restructuring or default),” said Kevin Akioka, high-yield bond manager with Payden & Rygel in downtown Los Angeles. “The market could be wrong, obviously … but investors are worried that (telecom service) prices will be coming down.”

In the late 1990s and into 2000, companies rushed to lay down fiber-optic cable, leaving the industry with thousands of miles of “dark fiber” abundant capacity that goes unused.

The tanking of other telecom companies doesn’t make Global Crossing stronger, but weaker, Akioka said. “The other telecom companies that have declared bankruptcy, will have a lower cost structure going forward, without onerous interest costs, which are a large part of this business.”

In other words, the cable remains in place. The glass wires are, in effect, sold to bondholders or others for 10 cents on the dollar, and then put back into service. Great for phone callers and net surfers lousy for surviving telecoms.

Winnick last week declined to comment, but Global Crossing CFO Dan Cohrs told Bloomberg News that “even in the face of a severe downturn, we will not run out of money.”

Shortly before being replaced, Casey said in a statement that he remained “extremely confident in Global Crossing’s business strategy and the fact that we will emerge from the current downturn as an industry leader well positioned for long-term growth.”

Casey blamed what he called “irrational trading” in the company’s stock on “highly inaccurate rumors and groundless speculation.” The company expects to end 2001 with between $1.7 billion and $2.1 billion in cash and liquidity. Next year, capital expenditures will decrease once Global Crossing’s Asian extension is completed in the first quarter of 2002, Casey said.

Despite those optimistic words, Global Crossing proceeded to get hammered. In a brutal Sept. 28 missive on thestreet.com, influential pundit James J. Cramer told shareholders to bid “sayonara” to Global Crossing, and wondered aloud how the company would shoulder its $9 billion in high-yield debt.

Cramer savaged a now-defunct Global Crossing financial strategy, which was to own shares in the Palo Alto-based Web-hosting service Exodus Communications Inc. Cramer said that Exodus stock was touted as “better than money in the bank,” and putatively balanced Global Crossing’s large debt load.

Exodus filed for bankruptcy two weeks ago, and now is a penny stock. Only a little more than a year ago, Exodus commanded $86 a share. The post-terrorism mood, combined with some actual defaults, have spooked investors, who are leaving junk bonds and junk-bond funds in droves, noted Akioka. But as is often the case, the best opportunity to buy is when others lack nerve. Some reasonably managed high-yield debt funds are offering annual yields in excess of 13.5 percent. High-yield bonds now offer more than 9 percent more in annual interest than U.S. Treasuries, noted Akioka one of the largest spreads ever.


Couch Time

With the problem of terrorism unsolved, at least in investors’ minds, some money mavens last week sounded more like psychiatrists as they try to decipher the market’s next swing.

“I would give it 100 days,” said Robert Gipson, co-fund manager with Los Angeles-based Alpha Analytics Group. “Psychologists talk about 100-day time period for people to absorb and to adapt to what has happened after a major trauma.” The sooner federal authorities can appear to have the terrorism problem licked, or at least seriously dampened, the sooner consumers and investors will belly up to the bar again, Gipson said.

Jeff Rollert, fund manager with ALM Advisers in Pasadena, sounded a similar theme. “After a tragedy, there is shock, then despair, then anger, and then acceptance,” Rollert said. “We have passed through the shock and despair stages, and going into the anger stage. The important thing, in the anger stage, people start to look forward, go into a proactive mode.”

The “maximum point” of pessimism is behind investors now, and so the groundwork is laid for a rally in equities and high-yield bonds, said Rollert, who especially likes certain depressed airline bonds, including Atlanta-based Delta Air Lines Inc.


Understandable

Wall Street investment jargon long has been daunting, but especially confusing has been the welter of qualified “buy,” or “sell” signals issued by analysts, such as “strong buy,” or “market outperform,” or even numeric codes, such as “1-3.” One of the most dubious ratings is “long-term attractive,” a category that almost any company could be lumped into.

Wedbush Morgan Securities’ head of research has decided to dump most of the qualifiers, and his analysts now issue only “buy,” “hold,” or “sell” recommendations.

“A rating like ‘long-term attractive’ means you really don’t like the stock, but you don’t want to offend anybody,” said Wedbush’s Michael Pachter.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” published by Bloomberg Press. He can be reached at [email protected].

No posts to display