DISH DISH Network Corporation

The safety of junk debt issued by cable, telecom and satellite giants is questioned

By Matt Wirz 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 9, 2018).

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 such as 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 telecommunications bond prices have declined moderately, Dish bonds have lost about one-quarter of their value in the past year, pushing yields above 9% 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-TV subscriptions toward streaming services is known -- is particularly worrying for high-yield bond funds because technology, media and telecommunications, 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.

That means 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 such as Charter can offset defecting subscribers with broadband internet sales, but the first quarter of the year brought unexpectedly low revenue 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, such as WorldCom Inc. and Global Crossing Inc., failed spectacularly in the early 2000s, when they ran out of money before reaching 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 $2.5 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.com Inc. 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 such as 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. The company Tuesday reported a 6% revenue drop for the first quarter caused by loss of satellite-television customers.

Stock and debt investors backed Mr. Ergen through the decades in part because he perennially explored selling the company, and its wireless licenses, to larger companies like DirecTV, AT&T, T-Mobile US and technology firm Amazon 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 traded Tuesday at around 82 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 $692,000, according to IHS Markit, and the value of contracts outstanding has jumped to $5.2 billion from about $3.6 billion over that period, according to DTCC Data Services.

Write to Matt Wirz at matthieu.wirz@wsj.com

(END) Dow Jones Newswires

May 09, 2018 02:47 ET (06:47 GMT)

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