Volumes for credit protection referenced to Deutsche Telekom jumped 10 times last week after the German telecom issued a EUR2.3 billion (USD2.47 billion) mandatory convertible bond. Deutsche Telekom's credit-default swap spreads came in 15 basis points to 190bps on Wednesday when the convertible priced. One trader said volumes jumped to around USD300 million, versus about USD30 million trading on a typical day. Hedge funds were the major buyers of protection.
The mandatory convertible issue was beneficial for both the company's credit spreads and rating, according to Vladlen Andriouchtchenko, senior analyst at Commerzbank Securities in London. One major advantage of the instrument is it is treated as quasi equity by the rating agencies, but is considered debt until it converts, for accounting purposes.
However, several other external factors, such as a potential war with Iraq and a France Telecom rights issue are likely to widen Deutsche Telekom's credit spreads in the near term, according to Andriouchtchenko. He explained that the telecoms are likely to be adversely affected by the war because of their correlation with the equity markets.
Deutsche Telekom issued a three-year convertible that pays a coupon of 6.5%. The note is converted into shares at a premium of 24% at maturity, according to Hans Ehnert, Deutsche Telekom spokesman. He said the company issued the bond now because investors showed a preference for debt over equity and Standard & Poor's views this strategy as positive for its rating. Officials at S&P did not return calls by press time.
Five-Year Credit Protection For Deutsche Telekom
