On the belief that the high-yield debt market will hurt equity values and produce higher borrowing costs, Macquaries Kevin Smithen is cutting his price targets on wireless carriers Frontier Communications (NYSE:FTR), Sprint-Nextel (NYSE:S), Leap Wireless (NASDAQ:LEAP), and MetroPCS (NYSE:PCS).
As measured by credit default swaps, bonds of all of these stocks are seeing rising premiums and are therefore seeing a spike in yields. Smithen sees a disturbing statistical correlation and the actual concern is higher premiums threaten borrowing costs.
“Widening yield spreads could cause leveraged telco equity values to ‘overshoot’ on the downside over the next few months as they did in 2008. Names such as LEAP, FTR, S and PCS have the most correlation to the high yield indices and could see further share price erosion if the high yield markets deteriorate further,” according to Barron’s.