Despite a flurry of good news that has lifted European telco credits, analysts are still warning investors to proceed with caution. In the past weeks, Colt received an equity injection from Fidelity, Jazztel has begun to restructure its balance sheet and KPN, as well as Sonera, have begun to focus on debt reduction. Last week, Sonera's 5.625% notes of '05 tightened roughly 70 basis points to 250 basis points over five-year swaps and KPN's 7.25% notes of '06 have come in almost 300 basis points in the past month to about 500 basis points over five-year swaps. "The recent rally is far from being a long-term uptick," warns a London-based industry analyst.
Louis Landeman, analyst at Bear Stearns, is still not sold on KPN, "We're taking a cautious approach to KPN. There's still a lot of uncertainty about how they're going to delever." Landeman says Bear Stearns is recommending market neutral positions for the likes of France Telecom, Deutsche Telekom and Telefónica because their credit ratings are under pressure. "We're in favor of bonds with a coupon step-up, because of the pressure on credit ratings," he says.
"Actual [earnings] are still quite weak, and demand is not really picking up," says Frank Knowles, high-yield telecom analyst at Merrill Lynch in London. However, Knowles argues that investors are looking forward, anticipating an upturn in demand and thinking valuations have bottomed out, which is driving some bonds higher.