High-yield/macroeconomics (fka YIELD)

[Democritus_of_Abdera]

IWA’s Q3 CC of Nov 5, 2008...

Abreis, I hope this update finds you well...

In summary, IWA remains a solid income stock but not very attractive from a growth standpoint.

Issues raised in the Nov 5 CC include:

1. The loss in telephone lines continues. Access line loss was about 1.8% for the quarter, largely due to wireless substitution and cable competition. This loss was offset by the acquisition of Bishop Communications this quarter, but a net downward trend will probably continue for the foreseeable future... Of most concern is the possible loss of commercial lines (CLECs) should the general economic malaise lead to widespread dislocations. IWA minimizes this concern by pointing out that most of their CLEC customers are school districts, local governments, and small businesses, so a single event will not wipe out a major number of lines... Never the less, I remain watchful.

2. IWA was adversely impacted by Lehman’s demise since Lehman was a counterparty of an interest rate swap designed to fix the interest rate on a portion of IWA’s debt. As a result, approximately $1M net credit was added to the Other Income line of the balance statement. This credit is non-cash and is not included in adjusted EBITDA; an additional $0.76M expense will be recorded as a consequence of Lehman’s bankruptcy spread over the next 3 yrs. A new swap has been negotiated to fix $175M of IWA’s Term Loan B debt at 4.13% vs the 4.115% of the prior swap agreement.

3. IWA’s status with respect to dividend payments has not materially changed. I do not see any threat of a dividend cut.

-----------
Issues that might affect the stock price during the next few quarters include:

1. The FCC may be coming close to a decision regarding revisions to the intercarrier compensation program for rural telecoms... see: http://www.rcrwireless.com/article/20081103/WIRELESS/811049968/1103/rural-providers-likely-losers-after-fcc-meeting

IWA does not get much benefit from these programs as they stand, so I think any movements in the stock price due to this item would be somewhat irrational. However, it is common for stocks to move in sympathy with industry trends.

2. CenturyTel is acquiring Embarq leading to speculation that there will be additional consolidation in the rural telecom market (purchase of Frontier Communications by Windstream is high on the list) ... see: http://www.moneymorning.com/2008/10/28/century-tel-inc/

Perhaps IWA will become embroiled in the consolidation wave... however, I have not seen any credible scenario other the possibility of a Morris Reverse Trust arrangement with Verizon’s midwest properties (see #msg-29791035).