Over 30 telecoms have been downgraded in the past 12 months, reflecting the event risk of consolidation and third generation license funding. But issuance is up $3.84 billion on the same period last year. How much longer will telecoms be able to remain buoyant in the face of credit downgrades? One of those to be downgraded this year is Telia, which signed its $2 billion Euro-MTN programme in 1997. Krister Kylas, treasurer at Telia, says: "The credit downgrades have certainly attracted a lot of attention, but the situation is not as negative as it is often portrayed. Moody's recently lowered us to A1 from Aa3. The significance of credit rating downgrades is often overstated and we have found this has made little difference to us as we trade like a triple-B anyway." Telefonaktiebolaget LM Ericsson (Ericsson) has issued $2.50 billion-worth of debt this year off seven trades, despite a recent downgrade from A to A-. Mads Madsen, media relations at Ericsson, says: "We have been downgraded along with our whole industry so the sector is still relatively stable. We have not been facing any problems raising the capital that we need." Many of the downgrades reflect the event risk present in a sector that is still immersed in M&A. One telecom issuer says: "Our downgrade was largely the result of an expensive merger and really hasn't affected our MTN issuance much. We have found it much easier to issue at the levels we want now that we are rated single-A in line with the rest of the sector." Nor did the ratings agencies catch the market off guard. David Meade, credit research analyst at Morgan Stanley, says: "Most of the downgrades were expected and were caused by the massive increase in debt incurred after the UMTS licences were acquired and other acquisitions were made. Because they were foreseen, spreads quickly repriced wider to reflect the downgrade risk, but spreads still widened more on the downgrade. Overall, the pricing of debt has gone up over the past year to reflect this risk." Figures add weight to the telecoms' claims that the credit downgrades have not adversely hit their MTN issuance. Both issuance and volume in 2001 are up on all previous levels reaching $18.67 billion off 51 notes from January to the end of May this year. And April saw the sector's highest monthly issuance with $9.64 billion off 17 trades. Despite the increased issuance, the major fear of any telecom is to see its current credit rating slip further. The upshot of which would be to increase its funding costs through higher coupons. One telecom issuer says: "While British Telecommunications' brand name may allow it to cope with its credit rating slipping to triple-B, for the less well known telecoms the consequences could be severe." Deutsche Telekom, by far the sector's most frequent issuer, is confident that ratings will not deter investors. Hans Ehnert, corporate communications for the issuer, says: "The market is well aware of our name and likes our credit story. Investor demand for our issues is strong." Lehman Brothers acts as arranger on six telecom programmes. The most recent signing is Telecom Italia and Sogerim's $10 billion global MTN programme signed in March. Brian McCarthy, head of Euro-MTN trading at Lehman Brothers, says: "We believe that whilst telecoms have really performed in the last 12 months, there are very good reasons for this. The fundamental backdrop of the sector has improved and the equity markets are open to IPOs and potential rights issues. Coupon step-ups are now being valued. It is true that debt has rallied in recent months, but there is no reason why this shouldn't continue." Morgan Stanley is the second-largest bookrunner off telecom issues in 2001. Neil McLeish, executive director, European credit strategist at Morgan Stanley, agrees that the sector's growth has been substantial. He says: "Telecoms have come a long way very quickly. The stabilization in credit quality has led to major improvements." Next generation licensing and acquisitions thrust telecoms into the headlines last year, but this excitement did little for the confidence of the sector in the MTN market. McLeish says: "The telecom sector was certainly in decline last year in terms of credit quality and the trading of bonds." Madsen, at Ericsson, experienced these difficulties first hand. He says: "The pricing development for telecom issuers over the past year has been very tough." But this decline has started to turn around. Proof of the sector's growing attractiveness is a widening investor base. McCarthy, at Lehman Brothers, says: "The investor base is changing. Real money, insurance and pension funds are all involved. More leveraged, speculative players and more asset swap buyers have been getting interested. The investor base is certainly growing." Meade, at Morgan Stanley, still believes telecoms could do more to improve their issuance. He says: "We would advise telecoms to be open about their story and considerate on the timing of issues. Don't issue ahead of releasing some negative news." Yet overall, Meade concludes that the outlook for the sector is positive. He says: "Even though many have been downgraded we still expect them to have access to the markets. They will still be of sufficiently high credit quality to attract investors in ways that they could before." Ehnert, at Deutsche Telekom, also remains positive. He says: "The market is at least as good as it has ever been."
June 08, 2001
