Hello everyone, my name is Sean Mathis. I am the co-founder of an independent investment bank in New York, Miller Mathis, which provides strategic advisory services to companies in complex situations. One of the areas we are particularly involved in is corporate and financial restructuring, where I have a background not only as an adviser, but also as a manager and as an investor. As a firm, we are constantly tracking and trying to anticipate trends in the world of restructuring, which means we keep a close eye on the high-yield market and on credit markets in general. As some of you may know, those markets have been running on overdrive in the last few years, with telecom supplying a lot of the rocket fuel, and this is what I would like to talk to you about today.

Let me start you out with a thought experiment. Imagine it's early 2002, and somebody asked you to make some predictions about the high-yield bond market's appetite for telecom over the next three years. Doesn't sound like it would have been a difficult question, right? It doesn't, and in fact, I'm sure that 99% of us in this room, myself included, would have given the same answer, which probably would have been that there isn't going to be much of a high-yield market for telecom issuers in the next few years. Not after the industry's track record in the early 2000s. The telecom bubble burst with a vengeance; companies built broadband capacity at an outrageous rate; and to top it all off, some of the largest corporate scandals involved telecom companies like WorldCom, Qwest and Global Crossing.

And the numbers would also bear this out. Of all the high-yield bond issues by telecom companies from 1998 - 2001, almost 20% of them defaulted in that time period alone. If one were to include defaults in 2002 and 2003, the figure rises to 45%.

In short, all indications were that investors were poised to punish the industry after the high-flying days of the late 1990s and early 2000s, and that telecom high-yield issuance was going to slow to a trickle. But all of us who made that prediction would have been dead wrong.

It's true that 2002 was a very dry year for telecom in the high-yield market, with just 3 high-yield bonds issued by the sector. But 2003 and 2004 witnessed an absolute explosion of high-yield bond issuance by telecom companies. So much so, in fact, that even including 2002, over the last three years telecom was the second-most active industry in terms of high-yield bond issuance by dollar volume, with over $20 billion in junk bonds issued, behind only gaming & leisure.

What does this mean for the industry going forward? In order to answer that question, you have to dig a little deeper, and look not only at total high-yield bond issuance, but also at the credit quality of those bonds.

Edward Altman is a professor at NYU Business School and is considered the #1 expert in academia when it comes to the high-yield market. He is also a member of my firm's advisory board, by the way. What Professor Altman has shown, over decades of research, is that bond defaults are very closely linked to their credit rating at time of issuance. This in itself may not be terribly surprising, but the numbers are striking.

For example, Professor Altman has shown that when you look at bonds rated BB+, BB or BB- at issuance, bonds which you might consider to be the "cream of the crop" of the high-yield market, an average of 12% of these bonds default within 5 years of being issued. If you go one step down the quality scale, and look at bonds rated B+, B or B- at issuance, then this figure more than doubles, to 28%. And if you go even further down the scale, at bonds rated CCC+ and below, 47% - almost half - default within 5 years. In other words, a good predictor of defaults in the next few years is the amount of low-rated high-yield bond issuance in the past few years.

Now, if you consider "low-rated" bonds to be those rated B- or below, then if you look at the historical average, it turns out that typically about 30% or so of all new issues of high-yield bonds fall into that B- or below category in any given year. Of course that figure fluctuates, but until very recently, it never got higher than 38%, which was in 1998.

But in the last couple of years all of that has changed. The U.S. is experiencing a major credit bubble, with tons of money on the sidelines and an explosion in hedge funds chasing too few opportunities. Credit spreads have tightened dramatically compared to historical levels, and many deals that would never had gotten done just a few years ago are being financed at very low rates.

The result for the high-yield market was that in 2004, the proportion of high-yield new issues rated B- or below shot up to a record 43%. This is way in excess of the historical average of 30%. And the beginning of 2005 was no different - during the first quarter of this year, fully 49% of high-yield new issues were rated B- or below.

And how has this credit bubble affected the telecom sector? If you look at the years 2002 - 2004, a time when most of us would have expected investors to have been very reluctant to buy low-rated bonds from telecom companies, it turns out that an amazing 68% of high-yield new issues by the telecom sector were rated B- or below at issuance. This is an absolutely shocking number. Stop and think about it for a moment - not only was telecom the second-most active issuer of junk bonds over the last 3 years, but over two-thirds of those bonds were issued at B- or below.

Well, you might say, maybe that figure is distorted because it counts the number of bonds issued rather than total dollar volume, and if we looked at dollar volume instead, the proportion would be much lower. It's a thought, but it turns out that looking at the "B- and below" proportion on the basis of dollar volume from 2002 - 2004 doesn't change things very much; the figure drops to 58%, which is still extremely high.

Another thought might be that "B- and below" is too broad a category to look at, and we should really be looking only at the absolute lowest tier of the market, i.e., those companies rated CCC+ and below. It's another nice try but the numbers continue to tell the same story - bonds rated CCC+ and below accounted for a striking 43% of new high-yield issuances by telecom companies from 2002 - 2004.

Even the telecom darlings of Wall Street over the past year - those high-dividend RLECs we hear so much about - have taken part in the act. Of the 6 RLECs to have adopted high-dividend policies or IDS structures in the past year or so, 4 of them have high-yield bonds outstanding. And it's not that these bonds are part of an otherwise unleveraged capital structure - on the contrary, these 6 high-dividend RLECs have an average Debt / EBITDA of 4.5x, as compared to just 2.6x for other RLECs.

Now, don't get me wrong here - the fact that so much high-yield capital has been invested in telecom over the last few years is good news for the sector, not bad. It shows that investor appetite for the industry remains strong, in spite of everything that happened in the boom-and-bust cycle.

But it's also important to look at these developments in the context of historical experience. And if history is any guide, expect a significant number of telecom companies that recently tapped the high-yield market to default in coming years. The triggers can come from any number of sources -higher interest rates, regulatory changes and technological advances are a few that immediately come to mind - but the end result is clear.

We at Miller Mathis have been monitoring this environment closely, and are constantly looking for ways in which we can be helpful to companies in light of these developments. For companies with highly-levered balance sheets, that means pursuing solutions proactively, before the market turns and they find that they have fewer options. And for those fortunate enough to have strong balance sheets and strong business models, that means helping them take advantage of the downturn in the credit cycle as an opportunity to consolidate and improve their competitive position.

Thank you very much for your time and attention.

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