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UK-listed telecoms group BT is planning to issue a multi-billion pound bond programme to address its GBP 11bn (EUR 12.4bn) debt and pension deficit, a source close to the company told dealReporter. He said he understood investment banks Goldman Sachs and Citi have been advising BT on its preparations and would take lead roles should the issuance go ahead.
A sector banker said there is currently ”massive interest” in telcos from bond investors after a GBP 700m bond was launched by Deutsche Telecom earlier this month and Swisscom issued a SFR 1.25bn bond last month.
The banker said a logical option for BT would look to raise long bonds in order to address the pension scheme deficit that is likely to be revealed to be as much as GBP 10bn next month. ”They’ll want to look at long bonds with maturities of five, 10 and 30 years,” he said. A BT spokesperson said: ”It’s always been our strategy to reduce debt when the opportunity arises.” The five year CDS spread for BT is currently at around 235bps, compared to around 66bps a year ago, suggesting a window for entering the bond market may soon slip away.
A market source had also heard BT may be planning to raise up to GBP 8bn in the bond market. “BT is thinking of dealing with all of their problems in one go,” he said.
BT’s triennial pension review is expected to reveal the deficit has risen sharply from the last shortfall of GBP 3.4bn measured at 31 December 2005. Last year, BT made a contribution of GBP 626m into the fund and recent reports suggest BT may be required to pay at least GBP 750m a year into the fund, as a result of a higher deficit. A further concern could be if the Pension Regulator steps in to demand additional pension payments should the deficit be at the higher end of expectations. A second source close to the company said: “The Pensions Regulator is under pressure because everybody’s pension deficit is up. You could imagine they could become more hawkish in this situation.” A spokesperson for the Pension Regulator said: “If it is a very large deficit we would look for a recovery plan from the company.”
Robin Ellison, a pension lawyer at Pinsent Masons, said: “The Regulator takes a pragmatic approach and will not drive a company into insolvency and lose jobs just because of pension contributions. Usually they encourage trustees to look at other options such as take a charge over some property.”
BT may reduce its net debt/EBITDA ratio from 3.4x to 3.0x in order to ensure it does not have its credit rating reduced further. Last week, credit rating agency Fitch downgraded BT from BBB+ to BBB on concerns that the core underlying growth drivers for BT, namely Global Services and UK broadband, have reached an inflection point and are no longer able to provide sufficient cash flow growth. As a result, Fitch expected net leverage at year end March 2009 to be as much as 2.4x. Last month, Standard & Poor’s reduced its rating on BT from BBB+ to BBB with a stable outlook, and Moody’s cut its BT rating from Baa1 to Baa2 with negative outlook. More downgrades could result in more expensive borrowing - especially when the company has to address a GBP 1.5bn loan maturing in December 2010 as well as a GBP 200m loan maturing in August this year. A reduction in BT’s rating would cause additional interest from the next coupon period at a rate of 0.25 percentage points for each ratings category adjustment by each rating agency, said the agencies.
S&P credit analyst Michael O’Brien said he expected the deleveraging impact on BT of reducing its ratio of adjusted debt to EBITDA to 3.0x from the current 3.4x would be about GBP 2.2bn. The telecoms group can draw on GBP 2.3bn, consisting of a GBP 1.5bn undrawn facility backing up its commercial paper program and another facility of GBP 800m. In addition, BT had cash of GBP 792m and investments of GBP 837m on 31 December 2008. O’Brien said BT has a number of options to preserve its intermediate financial risk profile before it weakens further, including the potential to modify dividends or to defer - or reduce - capital expenditure as it sees fit. Full year results will be announced on 14 May. But he added; “If these don’t work out, it will put more pressure on the outlook. If the economic outlook remains negative it would give them limited scope to deliver.”
At the same time, BT is expected to announce a major round of redundancies in its troubled Global Services unit, as this news service wrote in February and was followed up in other reports last weekend. The redundancy programme will be along the lines of the 10,000 job cuts made by the group earlier this year. The group is also expected to announce a writedown of GBP 300m on the Global Services arm, on top of a Q3 writedown of GBP 336m on the unit last year.
The problems affecting the group are perceived as limiting BT Chief Executive Officer Ian Livingston’s options to address the pension and debt issues. The second source said: “These problems are considered home-grown issues that are not to do with the economic situation. Shareholders will make him partially responsible.” The source said this would make a rights issue unlikely: “A large rights issue would be pretty disastrous for the company. It would cause a lot of upset for shareholders.”
BT, the market source suggested, may have looked at a split but added this was unlikely because it would undermine inherent advantages the company has over its competitors. He said: “The company has always been against this,” but added that Livingston could take advantage of the Pension Regulator ”seen to be forcing his hand.” A second industry banker said: “The pension trustees would never allow the company to get away with it.” A third industry banker said: “It’s not the kind of thing Ian Livingston would do.”
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