Adelphia Aside, Worst Seems over for Telecom Lenders

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As Adelphia Communications Corp. prepared its bankruptcy filing and negotiated debtor-in-possession financing on Monday, Wall Street weighed in on when the defaults plaguing the telecommunications sector and its lenders might end.

But while the second-quarter defaults are higher than they were in the first quarter, analysts said the worst seems to be over.

Most big telecom credits are on the books of banks with more than $25 billion in assets, said Gerard Cassidy, a bank analyst at Royal Bank of Canada's RBC Capital Markets.

The sector's biggest lenders have been Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp., and to a lesser degree FleetBoston Financial Corp. and Bank One Corp. For the most part, banks have identified the troublesome credits, even though they have a ways to go in terms of writing them off, Mr. Cassidy said.

"For an industry problem, it's very manageable," he said.

This quarter has featured a series of problems for telecom and cable operators. Several companies, including XO Communications Inc. and Williams Communications Group Inc., have filed for bankruptcy protection, while others, including WorldCom Inc., suffered setbacks at the hands of ratings agencies.

The defaults so far this quarter have been "above the first quarter but below the fourth quarter," said Steve Wharton of Loomis, Sayles & Co. LP. "I think we've had the worst of it. The banks have fairly robustly provisioned for losses."

Trouble in the sector seems to have peaked this year. According to research by Goldman Sachs Group Inc., the telecom and cable sector had $39 billion of bond defaults during the first half of the year (including Adelphia's) and accounting for 70% of the total default market. This compares with $30 billion of defaults in the sector for all of last year, when the telecom and cable sector accounted for just one-third of all defaults.

Lori Appelbaum, a banking analyst at Goldman Sachs who has been tracking telecom defaults, including those at WorldCom, XO, Williams, and Qwest Communications International Inc., says that the list of defaulting companies does not appear to be growing. …