Get to know us. Our unbiased credit research and global market insights help the world’s financial decision makers to better manage risk.
U.S. Telecom: The Leading Lead Concerns
Davis Hebert, CFA – Senior Analyst - Telecom and Cable
Hunter Martin, CFA – Senior Analyst - Media and Cable
Mark Lightner, Esq. – Head of Special Situations Legal Research
Brian McKenna – Analyst - U.S. Telecom and Media
EXECUTIVE SUMMARY
- Lead issue contributes to more sector fatigue and new ESG overhang. As if the telecom sector hasn’t had enough to deal with in 2023, an 18-month WSJ investigation hit last week that brought to light concerns that thousands of “relic” lead-sheathed cables are potentially leaching into the environment and causing health concerns. We think the lead issue will be a long-term overhang (especially for the ‘E’ in ESG).
- So many questions, but so much time. We believe investors should pay attention to these issues, as the allegations are serious and could come with significant financial penalties, or at the very least distract from growth-focused investment. However, we think it could be years before it can be decided a) if there is a problem, b) what needs to be done about it, c) who is responsible, whether legally or financially, and d) who pays for remediation, if any. The time between a) and d) could take years before there is any financial impact to the telcos, in our opinion, and it might not even get past a), leaving a tremendously wide range of outcomes. We note that AT&T (as successor to Pacific Bell) agreed to remove two cables (although admitted no wrongdoing) from Lake Tahoe in November 2021, but we are not aware if the company has even begun work on removal yet.
- Our early read on remediation cost is $11 billion, but clearly a lot of margin for error. Our estimate is based on $70,000 per route mile for either removal or encasement, using the AT&T/Lake Tahoe example mentioned in the WSJ report (another source estimated the cost at $550k over eight miles, or $69k per route mile). We assumed less than 10% of 3 million total fiber route miles (assumes fiber has overbuilt the lines in question) would be subject to risk (300,000 route miles) and roughly half would be subject to cleanup (e.g., underwater versus buried), or 150,000. The simple math would put the cleanup cost at $11 billion ($70k/mile for 150k miles), although we think it is near impossible to accurately pinpoint a liability at this point. This is just a start, and we will update our estimates as we gather more information. In the meantime, we believe the lead issue will be an overhang on the sector (whether real or perceived) and that investors will likely be somewhat defensive in the near term.
- We see AT&T as most impacted. The WSJ article suggested most of the focus was on long-haul, underwater cables built from the late 1800s through the early 1960s. That might suggest the AT&T long-haul network is primarily in question, but we believe it could also potentially involve local infrastructure, which would bring AT&T (again) as the largest ILEC, followed by Verizon, Lumen, Frontier, Brightspeed and Windstream, under the microscope.
- Could Ch. 11 process provide a defense for WIN and FYBR? We believe Windstream (tenant) would be responsible, as described in the lease agreement with Uniti under “normal” circumstance. However, we note that bankruptcy counsel for Windstream and Frontier have likely spent considerable time over the last week exploring and advising on whether their respective chapter 11 reorganizations in 2020 and 2021, respectively, provide them with protection, even if limited, from a portion of potential exposure going forward. A key factor in that analysis might be what Windstream and Frontier knew about this issue at the time of their respective bankruptcies. We can’t say for certain but these two are in a unique position versus peers.
- Cable, fiber, wireless players likely unimpacted. We believe the cable and fiber sectors of the telecom industry are likely unimpacted by this report, since it involves networks built prior to the 1960s.
RELATIVE VALUE
As if the telecom sector hasn’t had enough to deal with in 2023, an 18-month WSJ investigation hit last week that brought to light concerns that thousands of “relic” lead-sheathed cables are potentially leaching into the environment and causing health concerns. At this point, we think the lead issue will be a near-term overhang but are not currently advising any major shifts in investment strategy for the sector.
Equities, bonds trade heavy on concerns. With most telecom companies facing growth challenges, the equities and bonds have notably reacted to the downside risk of toxic lead liability or cleanup cost. Frontier stock has reacted the most negatively, down 30% over the last week, as we believe investors are concerned that the lead overhang could create a new obstacle to raise capital for its fiber project, while Lumen stock is down 15%, AT&T down 12% and Verizon off by 11%. Spreads are also wider for these names, as shown below. AT&T’s 30Y widened out ~15 bp since the WSJ report was published, while Frontier bonds are down several pts.
To download the full article, fill out the form opposite and we’ll email you a PDF copy of the report.
Would you like access to the report?
Submit your contact details to request the full report.
Request a Trial
Receive 1-month complimentary access to our research platform, where you can browse our library of expert-produced insights and reporting. Qualifying institutions can gain access to our platform.
REQUEST A TRIAL
Sign up to our Newsletter
It is our mission to enable fixed income professionals to know more, risk better, and ultimately create value. Sign up to receive our monthly newsletters to get the latest credit insights direct to your inbox.
SUBSCRIBE NOW
Our Products
We’re proud to be the trusted resource for these credit research consumers:
Research
The independent research and actionable ideas you need to help guide investment and risk management decisions.
Risk Products
From BondScore to Credit Quality Score and Fallen Angel Score, these products give you an analytial edge.
Covenant Review
Brokers, financial advisors and private wealth managers entrusted with their clients’ assets leverage our intellectual capital when it comes to the credit markets.
LevFin Insights
News and analysis covering the debt capital markets including leveraged loans, high yield, secondary trading, CLOs, middle market and BDCs.
Markets Served
We’re proud to be the trusted resource for these credit research consumers: