European telecom companies appear to be on the verge of issuing a new type of securitized debt backed by customer receivables, and this is making some market players edgy because the securities would carve out assets that unsecured bonds currently have first call on. The impact has yet to be felt on secondary prices because the deals haven't been finalized and many buysiders are unaware of them. "There has been no reaction in the bond market on the news because there hasn't been any news yet," says Tony Moverley, telecom analyst for Merrill Lynch in London.
Among the expected issuers, Telecom Italia has EUR2 billion in outstanding bonds, and is planning to issue another $1 billion in euro denominated debt that will be backed by fixed-line telephone bills in the next quarter, according to industry officials. France Telecom has debt issuance of EUR 18.7 billion, and is planning to issue EUR5 billion ($4.6 billion) backed by payments from residential and commercial customers in the fourth quarter, they add. The new debt structure will alleviate some of the short term pressure on the companies, but could effect their long term relationship with investors, saysAndre Gorodilov, telecom analyst forCredit Suisse First Boston in London. "At a certain point unsecured bondholders will begin screaming, and [European telcos] could jeopardize their relationship with the market."
European telecoms are facing a credit crunch as they borrowed large amounts last year to participate in auctions for third-generation cell phone licenses, and ratings agencies are applying pressure to reduce debt or face credit downgrades. However, some argue the size of the likely ABS deals will be too small to really hurt the companies.
"France Telecom has $60 billion in total debt, and they're talking about securitizing less than $5 billion--that simply is not enough to have an effect," says Sarah Martin, telecom analyst forLehman Brothers in London. The same is true of Telecom Italia which has about $19 billion in net debt, she says. The only possible negative Martin perceives in such a deal is that secondary spreads could widen on investor concern.
"There's been a lot of talk across Europe about these types of securitizations," says Duncan Warwick-Champion, director of corporate ratings at Standard & Poor's in London, who believes the securitizations are "only a marginally positive idea."
Moverley believes it may be the ratings agencies that dictate how much the telcos decide to securitize. "The companies will tell the agencies what they are planning, and the agencies may say if they do $5 billion they face a credit downgrade but at $4 billion they're fine."
"Investors and issuers are both thinking about this," says a New York based buy-side telecom analyst. She recently attended a British Telecom road show where investors asked the company if it was considering new types of securitizations. "They said no, but they had a very prepared answer, so it sent a clear signal to me that both BT and the investors were thinking about it." Calls to the three telcos were not retuned by press time.