Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Buried in last week’s debt sell-off was an important message to credit investors: Not all bonds are the same, and those of telecommunications companies appear worse off than others.

While U.S. high-yield bonds lost 0.8 percent last week, debt of companies such as Frontier, CenturyLink and Intelsat were hit even harder. Speculative-grade bonds of telecom companies lost 1.3 percent on average, more than those in any other industry.

Bigger Losses
Debt of telecommunications companies suffered disproportionate losses last week
Source: Bank of America Merrill Lynch U.S. High Yield Index

The pronounced industry weakness was due in part to some company-specific issues, such as some disappointing second-quarter earnings and merger speculation. But the disproportionate declines highlight broader investor concern about an increasingly challenging backdrop for these companies. 

Windstream Holdings, for example, halted its dividend last week while also announcing plans for a share buyback. Its $700 million of bonds maturing in 2020 plunged nearly 10 percent, while debt of the Uniti Group real estate investment trust, which relies on Windstream as its main customer, plummeted in tandem.

Cliff Diving
The value of Windstream's bonds fell last week, dragging down Uniti's debt with them
Source: Bloomberg, Finra's Trace bond pricing service

Frontier, the wireless provider that has struggled to effectively integrate assets it bought from Verizon last year, reported worse-than-expected earnings earlier this month. Its leverage ratio has creeped upward, a trend that may continue on the heels of falling revenue and muted free cash flow, according to Bloomberg Intelligence's Stephen Flynn.

On the acquisition front, Sprint, the U.S.’s fourth-largest wireless provider, failed again to get a concrete suitor after months of seemingly being on the market.

But a unifying theme underlies all these woes. Wireless technologies are evolving, requiring expensive investments. There’s a pricey race to accumulate cell tower sites to provide a broad enough network for customers. And these companies have already incurred huge debt loads, making them more vulnerable if their revenues decline or even fail to grow meaningfully.

Lotta Leverage
Junk-rated telecom companies have nearly doubled their debt loads in the past eight years
Source: Bank of America Merrill Lynch index data

These ingredients are starting to form a toxic brew. While a collapse is hardly imminent for these companies, it's worthwhile questioning what their futures look like in three, five or 10 years. And from debt investors' perspective, it's worth taking note of this, especially in light of current trends in the $1.3 trillion U.S. junk-bond market. Instead of a broad-based sell-off, weakness has cycled through specific sectors, one or two at a time. (Remember when energy bonds were the focus, back in 2014 and 2015, or retail debt of late?)

Telecom debt was already having an unimpressive year before last week, but it just took a turn for the worse, making it look like the next sector up for prolonged distress. If investors are concerned that the weakness goes beyond individual trouble spots, debt of telecom companies could get be in store for notably steep losses.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net