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When Telefónica this week unveiled its all-cash take-over bid for O2, executives of the Spanish telecoms group will have hoped bankers would not draw too many parallels with the last large debt-funded cross-border telecoms deal in Europe.

But veterans of the debt market could not help but draw comparisons with France Télécom's acquisition of Orange, the UK mobile operator, in 2000. That deal, which was largely in cash, helped contribute to the huge pile of debt that forced the French telecoms group to launch a rescue rights issue just a few years later.

Telefónica is planning to pay for the purchase of O2 with a syndicated loan worth $32.7bn that, according to Thomson Financial, is the largest ever loan in dollar terms. France Télécom's loan was $27bn, though, if measured in euros, it is slightly larger.

The most recent loan is a striking reminder of the extraordinary amounts of debt that are available to corporate borrowers as low worldwide interest rates, a search for yield by investors and changes in the regulation of banks' capital requirements have helped to create the wave of liquidity currently washing through the financial markets.

Bankers say liquidity means borrowing may be easier than it has ever been. “Financing conditions are possibly as compelling as any of us have ever seen,” says John Winter, head of European investment banking and debt capital markets at Barclays Capital.

The ability to borrow large amounts at cheap rates has been largely responsible for fuelling the growth of private equity buy-outs. However, blue-chip companies have been more reluctant to take on substantial borrowings to fund acquisitions.

In the past few years, volumes in the investment-grade syndicated loan market have been growing quickly but this has been largely due to companies refinancing existing debt or borrowing in order to buy back their own shares.

By contrast, borrowing to fund acquisitions - so-called “event-driven financing” - tends to attract more interest from banks because companies are generally willing to pay higher rates of interest for those kinds of loans.

“There is still a tremendous pent-up demand for event-driven financing,” says Steven Victorin, head of global loans North America and Europe at Citigroup. “The syndicated loan market has been waiting for increased event-driven activity, which is a key volume and revenue catalyst for the Investment Grade sector”.

Bankers said the terms of Telefónica's loan, which is being underwritten by Citigroup, Goldman Sachs and Royal Bank of Scotland, underlines the appetite for credit among banks.

The Spanish group said it expects the loan, which has a maturity of up to three years, to attract an interest rate of no more than 40 basis points above the London Inter Bank Offering Rate. “A €27bn loan at 40bp above Libor is incredibly cheap for that size of loan. The question is at what level it is going to be refinanced, if the deal goes through,” says Satyajit Chatterjee, credit telecoms analyst at SGCIB in London.

After the announcement of the deal, Standard & Poor's immediately cut its rating of Telefónica's debt to A- and said it would lower the rating to BBB+ when the deal is completed because of the aggressive nature of the proposed acquisition.

One unanswered question is what fees Telefónica has negotiated with the banks underwriting its facility, although competition means are also likely to have been squeezed. One banker said: “What people have to negotiate with are spreads and fees. Pricing and fees have only gone one way.”

The banks underwriting Telefónica's loan are expected to syndicate the facility to other banks around the world, many of whom are expected to participate in the hope of securing a role in arranging refinancing or else winning other business with the group.

{bs}Bankers said demand for investment-grade syndicated loans had also improved because the introduction of Basel II regulations meant banks will in future have to hold less of their capital against loans made to highly-rated companies.{es}

In the longer term, Telefónica is expected to refinance its borrowings, though bankers expect the cash flow to help repay some of the loan. “Telefónica is likely to issue several different bonds, in various currencies and maturities,” says SG's Mr Chatterjee. “They have two to three years to do this and we expect them to kick off the refinancing at the start of next year. It's the bondholders who are going to pay for this.”

Credit analysts at BNP Paribas forecast Telefónica to issue “at least €7bn-€8bn [in bonds], probably across the [yield] curve and split between currencies."

The operator could also issue a hybrid bond, which carries higher interest payments. For Telefónica, the main concern is that the debt markets remain benign while it completes its refinancing. Bankers and investors, meanwhile, will be hoping the company does not suffer the same fate as France Télécom.

Copyright The Financial Times Limited 2017. All rights reserved.
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