GST Gets Warning Call From Deutsche

Deutsche Banc Alex. Brown recently sounded a warning bell on GST Telecommunications Inc.'s outstanding debt, echoing concerns of many high yield analysts and investors over the company's near-term liquidity.

Deutsche analysts Anthony Klarmen and Melvin Rosa cautioned that the company is not only facing a near-term cash shortfall, but also doubted management's capabilities to carry through a successful business plan.

GST is wrapped up in a number of business moves that could parlay into nearly $60 million, the analysts acknowledged in a recent report. Still, those plays will not compensate for the $90 million funding gap that the analysts are predicting for fiscal year 2000. In fact, the report forecasted that GST would need new capital by late March.

GST's chief financial officer Dan Trampush said the skittishness is unwarranted.

"We're working on a number of fronts for liquidity," Trampush said. The company is actively involved in negotiations with several parties to secure vendor financing and private equity, as well as divesting the company of its Hawaiian assets, he said.

Private equity firms like Hicks, Muse, Tate, & Furst and Forstmann, Little & Co. have pumped millions of dollars of funding into the competitive local exchange (CLEC) sector in recent months. Trampush, however, would not name any specific partnerships. Still, he added, "We could fund 2000 without private equity."

The next fiscal year, however, could prove even more challenging, perhaps driving GST back into the high yield market, he said.

"After 2000, we need to look at other sources of funding," Trampush said. "In mid- to late-2000, we might take a look at the high yield market. I wouldn't rule out the high yield market, but we'll need to look at it at that time."

In the near term, however, the company expects to sell its Hawaiian network. Though Trampush would not discuss the specifics of the transaction, he said investors could look for an announcement later this quarter. Deutsche Bank speculated that the transaction could fetch as much as $80 million and, net of debt reductions, could be as high as $40 million.

Even with more liquidity on hand, however, analysts also have expressed concern over a recent reshuffling within the company's top management.

At the end of January, GST President and Chief Executive Officer Joseph Basile resigned. Tom Malone, GST's chief operating officer, stepped in to fill the vacancy while the company's board of directors searched for a replacement.

While PaineWebber telecom analyst John Hodulik interpreted Basile's departure as an end of the company's plans to raise private capital, Trampush denied that this is the case. Not only did he stress that Malone was capable and focused on executing GST's business plan, but he also said that the firm's commitment to securing private equity was on track.

Despite the company's positive outlook, analysts remain doubtful.

"All of our projections for revenue and cash flow are meaningless unless GST meaningfully answers its long-term liquidity position in the next three to five months," Klarman and Rosa said in their report.

GST will report fourth-quarter and year-end figures on March 7 for the period ending Dec. 31.