(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Quentin Webb
LONDON, July 5 (Reuters Breakingviews) - Telefonica (TEF.MC)
may need to do more to counter its financial ties to Spain. The
phone company’s credit ratings and funding costs are suffering
as the country totters, even though three-quarters of sales are
Capital-hungry European telecoms have traditionally relied
heavily on bonds. But as the euro crisis shuts corporate
borrowers in weaker countries out of the market, maturing debts
may need to be covered by bank loans or existing cash resources.
OTE (OTEr.AT), Greece’s former telephone monopoly, is
raising funds by selling units in Bulgaria, and has already
exited Serbia. Portugal Telecom PTC.LS belatedly halved its
dividend and, like some domestic peers, will now issue new bonds
to Portuguese retail investors rather than Europe’s
institutional bond buyers.
But the big worry is Madrid-based Telefonica: a far larger
company, with 7 to 8 billion euros of debt to refinance every
year. Moody’s, Telefonica’s toughest critic among the rating
agencies, rates Spain at the bottom of investment-grade and
Telefonica only one notch higher, at Baa2. It may cut both
again. Yields on Telefonica’s five-year euro bond, which stood
below 4 percent in March, spiked at 7.5 percent in late June,
and now stand above 5.8 percent.
Other agencies are slightly more generous. But two “junk”
ratings - a possibility if Spain is downgraded further - would
render Telefonica debt unpalatable for many investors. That
would mean a lot of new debt for Europe’s smallish high-yield
bond market to digest. Telefonica’s banks would honour credit
lines, but replacing expiring ones would become more expensive.
New bond debt would prove costly and limited.
So what can Telefonica do? It began a big self-help
programme in late May. It is raising cash by selling down in
China, cutting debt in Colombia, exploring partial floats for
units in Germany and Latin America, and switching to paying
dividends partly in stock. All that is good as far as it goes -
but may not be enough.
Structural financial fixes are troublesome. For example,
bonds issued through a ring-fenced unit in Britain, or backed by
network assets, could win higher ratings. But borrowing like
this would further crimp the parent’s creditworthiness, by
reducing the cash available to meet its own obligations.
The most obvious lever to pull would be to build on the
dividend curb, which looked both timid and slow. A complete end
to cash payouts may soon be needed. That could save more than 4
billion euros a year. Telefonica’s hefty forward dividend yield
- nearly 8 percent, on Starmine estimates - already suggests
investors are sceptical about the payout’s sustainability.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- On June 20, Moody’s downgraded Telefonica to Baa2, the
second-lowest investment-grade rating, and said it could
downgrade the Spanish telephone company again.
- IFR: High-yield spooked by Spanish junk threat
- Moody’s statement: link.reuters.com/jyv29s
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(Editing by Chris Hughes and David Evans)
Keywords: BREAKINGVIEWS TELEFONICA/
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