Top 250 2005 - A bridge too far?
Telecom Italia began 2005 with moderate funding requirements, having already issued US$8bn equivalent in 2004 with particular successes in US dollars and sterling. But its venture into the uncharted 50-year euro territory represented a turning point in the credit bull market as investors questioned the validity of a risk premium that had all but disappeared. Helen Bartholomew reports.
Telecom Italia went into 2005 with no fixed financing plan given that it had been particularly active the previous year across the three main currencies. With a focus on debt reduction following the €20bn purchase of the remaining stake in mobile arm Telecom Italia Mobile (TIM), most of the issuer's recent visits to the primary market have represented refinancing of outstanding debt. Throughout 2004, the issuer also completed a series of asset sales including operations in Chile, Venezuela and Greece, to address debt reduction, but with the December 2005 TIM acquisition, net debt stood at around €44bn by early 2005 and the issuer is targeting a reduction to €33bn by the end of 2007.
As the first corporate issuer to open the 30-year sector, it came as little surprise that Telecom Italia would also be the first to open the 50-year sector earlier this year, following fast in the footsteps of the successful transaction from the French Tresor.
For the issuer, the deal could be seen as a huge success in that it sold €850m of due 2055 bonds at the very top of the bull market, pricing at 98bp over mid-swaps, equivalent to 106.4bp over Bunds. But many believe that the long-end was still in a relatively precarious position and that the re-opening of longer maturities for corporate issuers might have been a premature move even at the 20 or 30-year level, let alone at 50-years.
TI's ambitious transaction represented an inflexion point in the wider market – where the bull-run had ended and spreads ballooned wider almost as soon as the bonds started trading. Less than a week after pricing, the bonds were quoted as much as 14bp wider and have since traded as wide as Bunds plus 186bp – almost 80bp wider than at launch. Although most bankers concede that TI was not the sole cause of the shift in sentiment, it was certainly a trigger as investors finally sat up and questioned whether pricing was in fact adequate for 50-year risk on a Triple B name.
Some bankers believe that the benefits to TI might have been relatively short-term. The issuer was able to take advantage of spreads at their all-time tights, but bankers warn that as the new volatility proxy, the 50-year could be more of a curse than a blessing for the issuer's ongoing funding requirements. Even so, the issuer returned to the primary market after confidence returned in early June with a benchmark 10-year sterling issue, capitalising on the success of its debut in the currency in 2004.
In fact, some of the issuer's most successful capital markets visits have come away from its native euro market. In June 2004, the issuer saw more than £1bn of demand for its inaugural sterling issue and was able to increase the deal size to £850m from a planned £350m.
In October 2004, TI was widely praised for its US$3.5bn three-part global issue. The package consisted of a US$1.25bn five-year priced at Treasuries plus 80bp, a U$1.25bn 10-year priced at Treasuries plus 100bp and a US$1bn 30-year, which priced at plus 128bp. While achieving funding levels some 10bp inside of a euro issue on the 30-year, 5bp inside euros on the 10-year and 7bp–8bp on the five-year, TI was able to offer US investors some much-needed diversity – with SBC and Bell South dominating the US telco sector – and was also able to take advantage of an improved outlook for the sector as a whole.
By the end of its 2004 funding programme, TI had refinanced the majority of its 2005 and 2006 redemptions, allowing it to take an opportunistic approach to its 2005 funding programme – hence the 50-year issue in March.
For the rest of the year, the issuer is expected to remain relatively quiet, with a focus on debt reduction following the completion of the purchase of (TIM). But with M&A creeping back on to the telco agenda, the issuer will have to keep an open mind concerning its debt reduction commitments should any suitable acquisition opportunities arise. It is currently eying an equity participation in the privatisation of Turk Telecom through a consortium, and is also set to purchase a €341m controlling stake in Brasil Telecom, pending an ongoing investigation.