Telefónica is one of the bluest blue-chip issuers in Europe, a company that has in the past been able to price jumbo deals across a range of markets and attract the very best investors wherever it goes.
But while the telco is a top-rated borrower, it is also a Spanish borrower, and this year it has been unable to avoid being caught up in the European peripheral sovereign and bank debt crises.
"Although Telefónica is a multinational company with a great geographical diversification (60% of our revenues and OIBDA come from abroad), we are a Spain-based company and as such we are affected by Spanish sovereign risk," says Eduardo Alvarez, head of financing for Telefónica in Madrid. "But the sovereign debt crisis, more than limiting our access to credit markets, is affecting us in terms of pricing. Our spreads are significantly higher."
The Baa1/A-/A- rated borrower issued a Eu1.4bn 2014 bond in March, before the sovereign volatility hit. In September, when it returned to the market after the sovereign crisis with a Eu1bn seven year deal, the change that had come about over the volatile summer was palpable.
"The environment was quite different to our last visit to the Eurobond market," says Alvarez. "In March, the sovereign risk concern was not as high in the credit markets as it is now. Telefónica has been the first Spanish corporate issue since March to access the Eurobond market, and there was some uncertainty about the reception from investors. Also, in terms of pricing, the spreads are now [early September] 30bp-40bp wider than in March."
Telefónica priced its 2015 bond in March at 93bp over mid-swaps after raising a book of just under Eu6.5bn, while its seven year September issue came at Eu148bp over.
The Eu1bn transaction in September was one of the first to appear in the bond market after an unusually long summer lull. As market volatility and uncertainty of issuance has challenged corporates across the board this year, the borrower has had to grasp issuance opportunities when they have presented themselves.
"Telefónica is a frequent issuer and as such has to take advantage of any window in the bond market," says Alvarez. "The volatility of the financial markets has been quite high this year, and there are not many opportunities to tap the markets in good conditions. We believe this time was one of those opportunities."
Diversity as well as opportunity
In the face of this market uncertainty, Telefónica has also looked to diversify its funding. Having tapped the Yankee market in previous years, it took the opportunity to return to the product in April with a $3.5bn three, five and 10 year issue.
"The Yankee market offers the possibility of raising significant amount of funds in all tenors, from three years to 30 years," says Alvarez. "It offers enough liquidity in any of the maturities a borrower may tap. As a frequent issuer, the Yankee market offers the possibility of widening our investor base. By mid-February, we saw that there was an arbitrage opportunity in terms of pricing versus the euro. So we prepared the documentation needed to be ready to issue when market conditions were appropriate."
Despite its successes in the bond market, Telefónica did not go straight to the public investors for the funding to back its Eu7.5bn takeover of Brazils largest mobile phone operator Vivo, but instead tapped the loan market.
"For acquisition purposes, we always prefer to use the syndicated loan market as it offers more flexibility in raising significant amount of funds," says Alverez. "Moreover, in July the bank market was more attractive than the bond market."
Banks appetite for Telefónicas Eu8bn acquisition deal was rapacious. The deal was 1.35 times oversubscribed, with 29 banks joining the facility, many at the top Eu500m ticket. But Alvarez says that despite the strong reaction from lenders, overall conditions in the bank market have become more challenging than before the financial crisis.
"We keep very good relationships with many financial institutions and they support the company when needed," says Alvarez. "However, we acknowledge that the situation in the bank market is different from what we saw in the past. Banks are more reluctant to lend (especially in the long term), margins and fees are higher, and banks put more pressure on getting ancillary business to improve profitability."
The facility comprises a Eu5bn three year plus one acquisition term loan and a Eu3bn five year revolver, which will be used to repay debt. The term loan pays a margin of 65bp, while the revolver, which refinances some of the debt Telefónica used to buy the Czech Republics Cesky Telekom in 2005, carries a margin of 80bp undrawn.
Telefónica expects to gradually refinance the loan through the bond market, and bankers say that public market investors would flock to a deal from this borrower.
"This sort of frequent, blue-chip company would have no problem accessing the bond market and investors would jump at the chance to see a deal from them," says Alberto Viarengo, head of corporate DCM origination for southern Europe for Royal Bank of Scotland in Madrid. "Telefónica is so diversified, in terms of its businesses and where it operates, that its one of the most sought after credits in Europe."
While investors and lenders are still clamouring for paper from Telefónica, the company is likely to recover from the sovereign volatility more easily than other, less well rated corporates from the region. But Telefónica has also adopted a practical, opportunistic approach to its borrowing over the year, which should stand it in good stead throughout any future volatility in the markets.