By Matt Wirz
The consumer stampede to streaming media from traditional
broadcasters is claiming an unexpected victim: high-yield bond
investors.
Telecommunications, cable and satellite companies have borrowed
hundreds of billions of dollars in junk debt to build networks that
would allow them to dominate their markets for decades to come.
The proliferation of internet-based providers is upending that
expectation, forcing investors to question the safety of bonds they
bought from companies like satellite broadcaster Dish Network
Corp., cable giant Charter Communications Inc. and landline
telecommunications company Frontier Communications Corp.
Dish, founded by satellite tycoon Charlie Ergen, may be the
canary in the coal mine of the new technological landscape. Junk
bond investors have lent his companies more than $30 billion over
the past 25 years, according to data from Dealogic, bankrolling Mr.
Ergen's construction of a satellite constellation and, more
recently, his buying spree of wireless spectrum. Now they are
dumping Dish bonds and buying record amounts of derivatives that
insure against a default by the company, fearing that the
industry's rapid evolution is outpacing Mr. Ergen's business
strategy.
Although most cable and telecommunication bond prices have
declined moderately, Dish bonds have lost about one quarter of
their value in the past year, pushing yields to 9.5% from about 6%.
Higher yields for companies rated below investment-grade concern
investors because such firms typically rely on new bond sales to
pay back debt.
Cord-cutting -- as the consumer shift from cable-television
subscriptions toward streaming services is known -- is particularly
worrying for high-yield bond funds because technology, media and
telecommunication, or TMT, companies comprise about one-quarter of
the $1.25 trillion junk bond market, according to the ICE BofAML
U.S. high yield index.
Put otherwise, one out of every four dollars invested by the
average high-yield bond investor goes to a company susceptible to
changing digital-media consumer behavior. The media component of
the index has lost about 1.33% this year compared with a 0.38% loss
for the entire index.
"The level of cord-cutting is accelerating," said Jared Feeney a
cable and media bond analyst for Neuberger Berman Group, which
manages $41 billion of high-yield bond investments. Cable companies
like Charter can offset defecting subscribers with broadband
internet sales, but the first quarter of the year brought
unexpectedly low revenues from video subscriptions and video
advertisement sales across the industry, he said.
High-yield bonds and media and telecommunications companies grew
up together in the 1990s in a largely symbiotic relationship.
Innovation and deregulation spurred the creation of dozens of new
satellite, cable and telecommunications companies whose founders
turned to the nascent junk-debt market for capital. Some grew
steadily and rewarded stock and bond investors but many, like
WorldCom Inc. and Global Crossing Inc., failed spectacularly in the
early 2000s when they ran out of money before hitting profitability
and used fraudulent accounting to mask losses.
Defaults are low right now in telecommunications and media
bonds, and some companies that offer broadband and wireless access
actually benefit from the move toward streaming media.
Investors are also more eager to purchase high-yield bonds than
most forms of debt because they are less sensitive to expected
moves by the Federal Reserve to fight inflation by raising interest
rates, which pushes down prices of almost all bonds.
Signs of cord-cutting trouble emerged last year when wireline
companies including CenturyLink Inc. and Frontier Communications
that deliver telecommunications over land lines reported
faster-than-expected sales declines and their bond prices dropped.
The cost of credit default swaps, or CDS, insuring $10 million
Frontier bonds has risen to $2.7 million from about $1.5 million a
year ago, according to data from IHS Markit. The company has about
$18 billion of bonds and loans outstanding in December, according
to its annual report.
The selling expanded to cable and satellite broadcasters such as
Charter and Dish this year as it grew apparent that their customers
are also abandoning them sooner than expected for internet-based
alternatives like Netflix Inc. and Amazon. Rapid change also
spurred a wave of consolidation, from AT&T Inc.'s deal to buy
Time Warner Inc. to Sprint Corp. and T-Mobile US Inc. attempting to
combine for the third time in four years.
AT&T, which has an investment-grade credit rating, has been
hurt because it owns satellite television operator DirecTV, which
like Dish is losing customers to streaming competitors. Satellite
broadcasters are especially sensitive to streaming-video
competitors because they can't sell broadband services to offset
subscriber defections.
Mr. Ergen, who still controls Dish, has outlasted numerous
satellite rivals like cellular phone magnate Craig McCaw and former
hedge-fund manager Philip Falcone. He foresaw the decay of
satellite video and began buying a large patchwork of wireless
network licenses more than a decade ago to help transition Dish to
the wireless broadband age. A spokesman for Dish declined to
comment.
Stock and debt investors backed him through the decades in part
because he perennially explored selling the company, and its
wireless licenses, to larger companies like DirecTV, AT&T Inc.,
T-Mobile US Inc. and technology firm Amazon.com Inc. that could
give Dish growth and security.
But as mergers sweep the industry, Dish has been left out and
bondholders are worried Mr. Ergen will wait too long and run out of
cash before he can realize the long-awaited merger that will
transform his company.
"I think the chances of a deal are pretty low," said Neil
Bizily, a bond analyst for Thrivent Financial, an asset manager
with $6 billion of high-yield bonds and loans. Thrivent has sold
out of all Dish bonds, even though the company comprises about 1%
of the index most high-yield bond investors measure themselves
against, he said.
Some of Dish's $16 billion of bonds recently traded at around 85
cents on the dollar and Dish credit-default swaps were the most
heavily traded high-yield contract in the default derivatives
market over the past three months, a CDS trader said. The price of
insuring $10 million Dish bonds has about doubled this year to
$661,490, according to IHS Markit, and the value of contracts
outstanding has jumped to $5.2 billion from about $3.6 billion over
the same period, according to DTCC Data Services.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
May 08, 2018 08:14 ET (12:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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