PREVIEW: KPN shrugs off downgrade with new 10-year
Dutch telecoms firm Koninklijke KPN, rated Baa2/BBB, is looking to raise €750m via a 10-year bond maturing in March 2022, just a day after S&P downgraded its rating by one notch citing expectations of weaker earnings in 2012.
Lead managers Citigroup, ING, Societe Generale and UBS have tightened guidance to mid-swaps plus 195-200bp versus initial price thoughts at mid-swaps plus 200-210bp after drawing demand in excess of €2.3bn.
“We would be cautious about layering in too heavily given significant uncertainty facing KPN creditors in the near-to-intermediate term, preferring Deutsche Telekom as a defensive pick in the European telecoms space, or Vivendi, Telefonica or Telecom Italia for investors looking to reach for somewhat yield-ier options”
The new issue will fit the issuer’s curve between its €500m 4.5% October 2021 bond and its €700m 5.625% September 2024 bond, bid at mid-swaps plus 171bp and plus 205bp respectively this morning, although both widening around 9bps after the mandate announcement. Pre-mandate levels indicate fair value for the new bond at around plus 176bp, therefore suggesting a new issue premium of around 20-25bp.
The October 2021 bond marks the issuer’s last venture in the €o-denominated market, an original 10yr deal launched in September last year.
S&P’s rating cut follows a profit warning by the company, the largest telecoms provider in the Netherlands, last month. The company also scrapped its generous annual €1bn share buyback programme for 2012 to pour money into its struggling domestic business.
S&P said KPN’s EBITDA generation will be impaired over 2012 due to the highly competitive environment in its local Dutch market.
The rating agency also warned its adjusted leverage analytics of three times earnings is notably higher than the 2.3 times originally forecast once pension deficits and capitalised operating leases are factored in.
“KPN was already on review for downgrade, and investors are comfortable with the credit. There wasn’t any market reaction to the downgrade, so we decided to go ahead,” one of the syndicate bankers on the deal said.
Analysts at independent research firm CreditSights said it was more comfortable with KPN’s longer-dated bonds than its shorter-dated debt, based on expectations that the company should be able to address the challenges it faces in the medium-to-long term.
“Nevertheless, we would be cautious about layering in too heavily given significant uncertainty facing KPN creditors in the near-to-intermediate term, preferring Deutsche Telekom as a defensive pick in the European telecoms space, or Vivendi, Telefonica or Telecom Italia for investors looking to reach for somewhat yield-ier options,” CreditSights said.
Spain’s Telefonica, which is rated slightly higher at Baa1/BBB+, raised €1.5bn with a shorter-dated six-year bond earlier this month at mid-swaps plus 300bp, which offered a 20bp new issue premium at the time.
