Case study

 France Telecom

by Professor Ian H. Giddy
New York University

Articles on France Telecom's debt financing

France Telecom confirms ABS

France Telecom has confirmed it is to launch a securitisation this year. With Telecom Italia also planning to raise funding this way, this could start a trend for telecoms borrowers.

The company is looking to cut its EU60 billion debt and believes a securitisation would contribute as well as its planned EU8 billion straight deal. 

A spokesperson for France Telecom said: "It should be done during the year. The goal is to diversify our funding sources in addition to bonds and bank loans, to have a third source of cheap financing."

Although lead managers have not been mandated as yet, it is believed Deutsche Bank and Societe General have started the preparation work for the transaction.

France Telecom is copying the example of Telecom Italia, which plans to issue a EU1 billion securitisation based on receipts of future telephone bills. 

France Telecom is rated A- by Standard & Poor's and A3 by Moody's.

Telecom Italia's ABS Financing

Since last year Telecom Italia has been talking about issuing a bond which is backed by its telephone bills. Today it finally issues, however Telecom Italia surprises the market by issuing a convertible.

But if the Italian operator does not return soon with its asset backed security, then it could be in for a surprise from France Telecom. The French rival operator is considering launching an ABS with a similar structure. 

Further to its attempts to tap the equity markets with the IPO of its mobile subsidiary Orange, France Telecom is considering issuing an ABS in order to reduce the debt it carries on its balance sheet. The move comes amid the growing concern about the debt levels the telecoms sector has built up following its acquisition of UMTS licenses last year. 

Telecom Italia's EU1 billion securitisation is rated AAA and is lead managed by WestLB. BNP Parisbas and Finanziaria are also involved in the deal. For the first time in Italy, the bonds will be sold from a master trust. The platform allows a series of deals to be launched out of the same legal entity.

France Telecom carries out record bond issue (France Telecom boucle une emission obligatoire record)
Le Monde - France; Mar 9, 2001

French national telecoms operator France Telecom SA has launched a giant bond issue worth FFr115bn, beating the record set by German counterpart Deutsche Telekom AG in June 2000. The operator decided to double the scale of the issue in response to investor interest. Initially, between $7bn and $8bn were to be issued: in the end, the same amount in sterling and euros were added. Investors have been attracted by the promise of generous returns, which will increase automatically if the operator's credit rating falls. 

The aim of the issue is to refinance high levels of debt (60bn euros at the end of 2000) built up by France Telecom as a result of international expansion and the cost of acquiring UMTS licences. The operator has undertaken to reduce the debt by between 20bn and 30bn euros within two to three years, mainly through the sale of non-strategic assets. 

One step at a time for credit protection: Credit covenants offer investor security, but there are risks.

Financial Times, Mar 9, 2001


France Telecom borrowed more than Dollars 16bn in the international bond markets this week, a record it was able to set because of the attractive price it paid investors and the protection it offered them in case its credit ratings fell. 

These legal covenants, called coupon step-ups, are supposed to give investors a sense of security about their investments. Such options bump up coupon payments in the event that the companies' credit rating drops beneath a certain threshold. 

The France Telecom deal grants investors an additional 0.25 per cent in interest payments for each notch below the A category that either Moody's Investors Service or Standard & Poor's lowered its rating. This is one of the best compensation packages available, and matches a similar step-up offered by British Telecommunications on nearly Dollars 20bn of debt it issued in January and December. 

KPN, Deutsche Telekom and Olivetti have also included step-ups in recent bond offerings. 

Step-ups tend to emerge in times of distress. Chrysler relied on them in the 1980s when the automotive maker was struggling to finance its turnround. 

European telecommunications companies have turned to them recently because they are in the awkward position of trying to borrow large sums of money at a time when they are already carrying heavy debt burdens from their expenditures on third generation mobile licences. 

Complicating matters, many have disappointed investors and credit ratings agencies with their efforts to reduce their debt by shedding assets. Moody's and S&P lowered France Telecom's rating just weeks before its most recent issue and most telecom operators face the prospect of rating cuts if they cannot reduce their debt burdens this year. 

"When you have a company like France Telecom that needs to de-lever and isn't coming to market at the most opportune time, then investors can demand it," said Shannon Bass, a portfolio manager at Pacific Investment Management Company, one of the largest fixed income managers in the world. 

As European companies face a period of unprecedented change and restructuring, the risk of actions that will hurt credit ratings, such as acquisitions or bigger leveraging, increases. Investors are asking for similar protection in other sectors. The utilities sector is the most obvious candidate, however, so far companies have resisted the moves. 

"Step-ups are creeping into the utilities sector but it won't be as widespread as in telecoms," said Michael Dolan, analyst at Bank of America. "We may see them on some large transactions currently in the pipeline." 

Welsh Water is planning nearly Pounds 2bn of bonds, possibly this month, and RWE, the German utility, is expected to raise at least Euros 3bn later this year. 

Step-ups are not the only device being offered to investors to limit credit risk. BT included a "put" option in a recent offering that allowed investors to demand early repayment of the bond if the company were to restructure and this led to sharp falls in ratings. 

Covenants can be risky for companies because they may increase financing costs at a time when they are already under pressure. For example, if BT's ratings were to fall into the triple-B category, triggering the step-ups, its interest bill would rise by around Pounds 150-Pounds 200m per year. 

Companies also risk sending the wrong message to investors. "If a company offers me a step-up, then they are definitely bound to be falling to junk bond status," said one portfolio manager. 

Although they provide some security to investors amid a mild decline in credit quality, they may be of little value in more severe cases. 

Analysis of existing telecom bonds with step-up coupons shows that the value of the option is worth 5-15 basis points. This value is not usually taken off the issue price - it becomes apparent during the trading of bonds in the secondary market. 

The differences in trading is one of the reasons companies with large amounts of outstanding debt, such as the automotive sector, are reluctant to introduce step-ups on selective bonds. The bonds with step-ups could set a precedent, and create a two-tier market for the bonds, reducing liquidity. 

Copyright: The Financial Times Limited 

Telecoms operators look set for long stay in debt markets: Equity markets' cooling sentiment means companies must turn to debt financing to fund 3G networks
Financial Times; Mar 16, 2001 

With hopes fading of a recovery in the equity markets' sentiment towards telecommunications and technology companies, telecoms operators are likely to remain as a fixture of the bond and loan markets. 

The plans of British Telecommunications, Deutsche Telekom, France Telecom and KPN of the Netherlands to reduce their combined debt of Euros 185bn (Dollars 169bn) by disposing of assets in the equity markets look increasingly optimistic, investors say. 

This means the companies will need to continue to borrow large amounts in the bond and loan markets. 

Carol Hamcke-Onstwedder, director of fixed income at UBS Asset Management, says: "The fact that debt financing needs will be high for some time is only just really starting to sink in." 

As well as the big four operators, other telecoms companies and equipment manufacturers have financing needs. 

Bond prices fell this week following bad news from the sector, in particular Monday's profit warning from Ericsson. 

The good news for the telecoms companies is that bond markets remain a source of substantial amounts of new cash, in spite of the uncertainty in the sector. 

France Telecom borrowed a record Dollars 16.4bn last week and attracted Dollars 28bn worth of orders from bond investors. 

The company had to pay a high enough rate of interest to build in the risks of rating downgrades in the sector and offer investors higher payments if its credit ratings should fall. 

The promises of management to maintain companies' ratings - most of which are still in the single-A band, but which are reliant on sharp debt reduction - are less credible amid equity market turmoil. 

Scott Marchakitus, analyst at JP Morgan, says: "Many firms will choose to see their ratings fall, rather than to sell assets at levels perceived to be below fair value." 

Mr Marchakitus calculates that for the big four telecoms operators to be able to hang on to their Single A ratings - something KPN has already failed to do, slipping down to Triple B - their collective debt would need to fall by Euros 87bn. 

For Triple B ratings, the reduction would need to be about Euros 48bn. 

"The A rating is not sacred and pricing in the bond market for some issuers already reflects a lower rating category," says Ms Hamcke-Onstwedder. 

Pricing in the loan market has also risen to reflect the new environment. Banks are also accepting less risk than they did for similar deals last year. For example, the Euros 2.5bn loan for E-Plus, KPN's German unit, is not underwritten. This means that the banks arranging it do not have to give the company the money if they cannot sell the loans. 

Capacity for telecoms financing remains an issue in the loans market. 

Although so far this year there has been relatively little activity in telecoms, there will be significant financing needs from the entire sector later this year and in 2002 - mainly to build third-generation networks. 

Until now, a large amount of the banks' exposure to telecoms companies has remained tied up in the short-term, 364-day loans extended to European operators to finance the purchase of 3G licences last year. 

But whether France Telecom, with a Euros 20bn facility expiring or British Telecom with a Pounds 18bn facility, and others choose to exercise options to extend these is key for the loan market. 

"Capacity for new fin ancing depends on the money allocated to these loan facilities freeing up," says Julian van Kan, head of loan syndications and trading at BNP Paribas. 

New bond supply - issues are expected from Telecom Italia, Deutsche Telekom and KPN - will keep a lid on the potential for price gains in the bond market. But debt investors are hoping that they have also priced in a sufficient cushion against sharp drops in value. See Capital Markets | | | | contact
Copyright ©2005  Ian Giddy. All rights reserved.