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August 4, 2011 11:13 am

eircom’s new business plan spells bad news for subordinated debt holders

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This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

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eircom’s new business plan projections leaves little doubt as to what the Irish telecom group’s subordinated debt holders would face in a planned debt restructuring, Debtwire reports. The plan, presented last Friday (29 July) to senior lenders, put the writing on the wall -- over EUR 1bn of debt could be written off, with severe losses for investors in the company’s junior debt tranches.

Negative macroeconomic headwinds, including emigration, unemployment and personal debt, reduced government and consumer spending in Ireland, severely impacted past profitability, the company said. The worse is yet to come -- next year’s earnings are expected to decline about 15% to EUR 553m from EUR 647m in 2011, while revenues will total EUR 1.6bn in 2012, said two sources familiar with the situation. The group has approximately EUR 2.7bn of debt, of which EUR 2.38bn is first lien, two other sources said.

The plan’s forecasts suggest an unflatteringly low valuation for Ireland’s largest telecommunications group. At an earnings multiple as low as 4x, eircom ranks at the very low end of the valuation scale in comparison with European counterparts.

The news sent prices on the second lien debt down by 10 points to around 12/15. “[Second lien lenders] will have a hard time finding a wrinkle to argue through at this point,” said one of the sources familiar. With the second liens on the trim, the group’s EUR 350m floating rate notes (FRNs) and EUR 643m PIK notes are well out of the money, all the sources said. The floaters were indicated at 6/8 while the PIKs are at 1 /2 suggesting steep haircuts for investors.

As eircom struggled with its debt issues, management, alongside majority shareholders Singapore Technologies Telemedia (STT), an affiliate of Singaporean wealth fund Temasek, and the Employee Share Ownership Trust (ESOP), joined forces over recent months to identify solutions.

Anticipating bad news, a group of second lien lenders in early July approached the company and sought a premature peek of the business plan and an independent business review by accounting firm Ernst & Young.

The investors, CVC Cordatus, Intermediate Capital Group (ICG), Invesco, Deutsche Bank and Silver Point Capital, and their advisor Moelis – proposed to work with STT and senior lenders to back the business with additional money, and if necessary, convert their holdings into equity.

The company, however, announced last Friday that shareholders are supportive of management’s business plan and their willingness to make a sizeable money injection if needed, according to the sources.

eircom, in its business plan, put forward a set of lofty cost estimates to cover the operational and balance sheet overhaul. It estimated EUR 315m of employee severance costs and EUR 400m to roll out its fibre optic network. That excludes the EUR 193m it budgeted to cover the planned restructuring from 2011 to 2016, and capital expenditure, which could total EUR 159m this year, EUR 320m next year, and EUR 320m or slightly higher from 2012 onwards, two of the sources said.

The budget rankled some investors who suspect the company of using them to justify its restructuring plan. “It’s an insane amount of money to spend on laying people off,” the first source said. “The plan is to increase competitiveness via downsizing the headcount as well as undertaking new investment into fibre roll-out. But if you are not competitive now in fixed line what are the chances in fibre?”

“The massive cost they presented could be this high to justify for STT coming in with new money to fund the need,” a second source said. STT is scheduled to meet the first lien coordinating committee in late August, he added.

Comprising SMBC, Alcentra, Avoca, Deutsche Bank, GSO Capital Partners and Harbourmaster, the senior coordinating committee represents around 28% of first lien. The creditor group, advised by Houlihan Lokey and Kirkland & Ellis, was created in April.

Around 60% of the EUR 350m FRNs are represented by law firm Cadwalader, Wickersham & Taft LLP, while a group, representing about 50% of the PIK notes, formed an ad-hoc committee. The group engaged Hawkpoint Partners Limited as financial advisor and Ropes and Gray International as legal advisor.

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