contracts and survivability of telecom sector

This evening I looked over the telecom companies that are my suppliers,
or who supply my suppliers, etc.

I noticed that all of them, including Level3 (stock symbol LVLT) have a
lot of debt ( numbers):

Company Name | Cash | Debt
ATT | 1.63B | 80.13B
Level3 | 666M | 6.84B
Verizon | 2.07B | 43.11B
Cogent | 129M | 330M

Obviously there are other, important numbers and ratios, but I won't go
into that here.

As you know, there are supposedly huge problems with companies, even
top-rated ones, in borrowing from the usual channels.

If you assume for example, that Verizon has notes of 10-year terms, then
(if the notes are spread evenly) they will need to borrow some $4Billion
in the next 12 months. If the terms are a lot shorter, then the amount
to borrow goes up significantly of course...

My question:

Are there any recommendations from an operational perspective, should
one or more of these or other telecom companies have such problems?

My belief at the moment, is that the risk is low, as operations will
always continue running even during bankruptcies (as some may have
already seen with other companies).

I am not interested in financial prognostications, I am solely focused
on operational issues that might affect e.g. connectivity.


Patrick Giagnocavo

Close but no cee-gar.

They'll need to come up with $4B to pay off the notes. There's no requirement
that they borrow to do it. They can do it out of their revenue stream, for
instance, just like most people who have to make a mortgage payment will do so
out of their paychecks, rather than borrowing to do it (and in fact, if a
person or company is relying on borrowing to pay off previous debt, that's a
Bad Sign).

To some extent, you're both right. I actually have some background in
this, so bear with me.

The telecom business is, fundamentally, about wringing as much marginal
additional cash flow out of your fixed infrastructure and operations
costs as possible. There are variances around the margins, such as
contribution margin of new services as they are marketed, but,
fundamentally, it's about constraining fixed costs and driving revenue.

One of the most important fixed costs is the leasing of the equipment,
fees for rights of way, etc.

Effectively, what has been the primary factor that drives the
profitability of facilities based providers has been the spread between
the leasing rates and the rates of return on capital their regulators
have allowed them. Hence the description of facilities telcos as "rate
factoring" businesses.

When the cost of money goes up, as it does in the current credit crunch,
it makes it next to impossible for facilities based providers to
economically improve their facilities, given the relatively inelastic
ROIC allowed by the PUCs.

VZ has the cash flow, but they'll use it to pay off the notes, as
opposed to roll over the notes and invest in the business, if the rate
factor on the new credit is uneconomic.

IOW, those selling gear to Telcos are in deep doo-doo.

Are there any recommendations from an operational
perspective, should one or more of these or other telecom
companies have such problems?

Make sure that you have more than one upstream provider,
preferably three providers minimum so that if one of
them is suddenly shut off, you still have resiliency.
In general, your upstream providers' operational networks
and you, the customer connected to that operational network,
are considered to be valuable assets so if a company falls
into Chapter 11, there is a good chance that another company
will acquire the assets. At the operational level, this is
practically invisible until they start to consolidate data
centers, prune unprofitable customers, etc.

But, sometimes the financial community looks at an industry
and decides that there is too much capacity chasing too few
dollars, and the best solution for all concerned is for one
of more companies to fail hard. This happened in Europe a
few years ago when KPN-Qwest bought Ebone's pan-European backbone
and then promptly declared bankruptcy. The receivers sent everyone
home, shut down the power to all the sites, NOC included, and
auctioned off all the equipment piecemeal, except for the fibre
network. That went to another company that was also building
a competing pan-European fibre network and which also went
through a bankruptcy process, shed all its employees, and then
was reborn. Not sure what happened to the customers in that case.

So this could happen in the USA, and the solution is to spread
the operational risk by maintaining 3, 4 or 5 upstream relationships.
Don't risk losing 100% or even 50% of your connectivity. Get it
down to 33% or 25% or 20% depending on what you can afford.
Having a connection to a local Internet Exchange of some sort
is probably a darn good idea. If you aren't peering with your
local competitors, maybe you should start to do so, and reduce
the risk to your community. In smaller markets, not NFL cities,
maybe you should consider using different upstreams than your
competitor to reduce the risk on a community-wide basis.

Also, remember that this whole crisis could blow over in a few months,
and if it does, you need to be prepared for increased traffic on
your network, increased customer connections, etc. That too, is
a risk to evaluate.

--Michael Dillon

One special case to consider - your provider gets taken over, and the new owner
regrooms the combined fiber networks, such that formerly physically diverse
paths no longer are...

One special case to consider - your provider gets taken over, and the new owner
regrooms the combined fiber networks, such that formerly physically diverse
paths no longer are...

These are lessons many learned 7 years ago...

No circuit is "set and forget", including so-called "protected" services. The way long distance and international capacity is swapped/bartered/remarketed reminds me of the complaints about the current credit-default swap market (with all of the opacity!)

If you care about your reliability/survivability, you have to watch all of the motions that an acquisition/transition will have on your infrastructure [not just your future needs, but your current ones]. In BK's, we've seen plenty of fiber providers hand over entrance facilities that they had previously constructed to new entities and contract back for the capacity they need. So it *looks* like the provider X build out to your facility is completely diverse from provider Y, but they are no longer diverse [with little -> no internal to the facility change].

Be careful out there...

Deepak Jain