Internet companies have connected with stock market investors, but they have yet to upload favor in the loan market.
Unlike the investors who have bid up Internet companies' shares into the stratosphere, bankers are taking a cautious approach in lending to the sector.
"It's not an industry we spend a huge amount of time on," said Peter Nightingale, head of loan syndication at Fleet Financial Group Inc. in Boston. "They just don't have the same value in the debt markets."
Bankers are troubled by the industry's lagging credit and anemic cash flows-and they've been pricing deals in accordance with the low credit ratings of the fledgling firms. The 31 loan packages, worth $17.1 billion, that bankers underwrote for Internet companies in 1998 total less than 2% of all loans they originated, according to Securities Data Co.
Recent bank loans to RCN Corp. and InfoUSA Inc. show that borrowing is a far costlier way to raise funds for Internet companies than selling stock.
Last week a $1 billion loan package led by Chase Manhattan Corp. for RCN closed with highly leveraged prices. And Deutsche Banc Alex. Brown began syndication of a $195 million credit facility to back InfoUSA Inc.'s purchase of Donnelley Marketing at prices ranging from the London interbank offered rate plus 250 basis points to Libor plus 300-highly leveraged levels.
These debt costs stand in sharp contrast to the favorable prices awarded to these companies in the equity market. Omaha-based InfoUSA is valued at $316 million in the stock market-nearly four times its book value-though it reported a net loss of $39.8 million in 1997 and net income of only $2.16 million last year.
And RCN, an Internet service provider building a costly fiber-optic network, is trading at 7.21 times its book value. It is valued at $3 billion, though its best quarter was the first three months of this year, when it reported a loss of 42 cents a share.
And these companies are getting a better reception from lenders than would many of their peers on the Web because bankers don't necessarily view them as Internet companies.
Some see RCN as a telecommunications company because it can provide other services through its network. And InfoUSA is considered a business and consumer marketing information company that uses the Internet as a means of distribution.
Joel Lustig, an Internet debt analyst for Moody's Investors Service, said the high prices the companies pay to borrow reflect their below- investment-grade ratings. RCN's senior unsecured debt carries a B3 rating, and InfoUSA's senior unsecured debt carries a B2 rating from Moody's.
Only a few firms, such as MindSpring Enterprises Inc., America Online Inc., and Amazon.com Inc., have been able to solicit either bank loans or nonconvertible debt in the capital markets, and that was only after those companies posted positive operating earnings, he said.
"As Internet companies go through an expected maturing process that will produce larger size and consolidation, we will see some companies produce positive earnings," Mr. Lustig said. "And at that level we'll see companies selling straight debt."
Until then, the imbalance between stock and capital-market costs will persist, Mr. Lustig said.
