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EDITIONS
Friday, 8 December, 2000, 09:08 GMT
Telecoms sector starved of cash
Children with mobiles
Trouble ahead for next generation mobile makers
Investors and banks are becoming increasingly wary about their exposure to telecoms firms.

Their fears have been fuelled by a steady flow of bad news from the sector and a warning from the UK financial regulator.

The Financial Services Authority (FSA) is writing to chief executives of banks, warning against lending money to the telecoms sector.

The warning came amidst concern that the banks are over-exposed to the sector.


It's cash under the mattress time

Roccardo Mindi
Lombard Odier
The FSA stressed that it believes most of the 34 banks in London are managing their risk prudently.

But exposures could be rattled up very quickly, so the banks should be cautious, the FSA warned.

Troubled telecoms

The regulator's warning coincided with a slew of telecoms firms revealing their problems.


The bigger thought is that this is not just a Motorola problem, but an industry wide problem

Eric de Graaf
ING Barings
On Thursday, Germany's MobilCom saw its share price fall 35% after a report said it had difficulties finding finance to pay for its new third-generation mobile phone project.

Similar concerns were expressed about the Hong Kong-based mobile phone operator Hutchison Whampoa.

And among the hardware telecoms firms, Motorola issued a profit warning.

"The bigger thought is that this is not just a Motorola problem, but an industry wide problem," said ING Barings technology analyst Eric de Graaf.

Indeed, during Thursday the share price of British telecoms equipment maker Marconi fell 8.3%. Swedish firm Ericsson lost 4%.

Even the Dutch electronics company Philips lost 4% as the ripples spread.

"Although handsets are of close to zero importance to Philips, in semiconductors, it supplies chips to almost all the major handset makers," Mr De Graaf said.

Big debts

Telecoms firms worldwide have long been borrowing money from anyone willing to lend.

In most cases, the cash has merely bounced through their bank accounts.


Most of these companies are not seeing falls in revenues, they are only seeing their growth slowing from, say, 40% profits to 20% profits

London banker
The money has been invested in expensive infrastructure, the development of ever-smaller mobiles, or it has been used to pay massive fees for mobile phone licences.

Big banks

The telecoms firms have often raised finance by issuing bonds or through syndicated loans rather than by selling shares.

Major international banks have generally underwritten their borrowing.

These include ABN Amro, Chase, Deutsche Bank, HSBC, Merrill Lynch, Royal Bank of Scotland and SG Investment.

But increasingly, the banks are becoming wary about underwriting such debts.

They are concerned about being over-exposed to this cash-hungry industry that is proving slow to deliver sufficient levels of profits.

Big investors

That is a view shared by many professional investors who are now cautious about technology stock in general.

"It's cash under the mattress time," said Lombard Odier fund manager, Roccardo Mindi.

Even fund managers who are seasoned technology investors are now questioning whether the telecoms sector is still in vogue.

Expensive licences

One senior banker blames the problems suffered by mobile phone companies on governments.

They have pulled money out of the sector by forcing up the price of the third-generation licences, he argued.

But shifting the blame does not remove the problem: Many telecoms firms are running out of cash.

Profit focus

One paradox continues to trouble the telecoms sector, the banker said: "Most of these companies are not seeing falls in revenues, they are only seeing their growth slowing from, say, 40% profits to 20% profits."

But when the dot.com bubble burst, investors shifted their focus away from growth in income towards a growth in profits - that is income less costs.

And along those criteria, many telecoms firms compare unfavourably to "old economy" companies.


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07 Dec 00 | Business
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