Mars 2014 - Crédit - Crédit aux telcos

Beyond the geopolitical and central bank policy headlines, we think that the numerous recent events in the telecom sector need to be carefully analysed, as they should impact the European corporate credit market – IG and HY – in various ways going forward. Specifically, we have monitored three broad sector themes:

-    The rise in M&A activity – mostly via debt-financed transactions – is more often than not driven by the current strength of debt capital markets. Some profound sector changes related to regulatory, technological and competitive challenges create the need for a new round of consolidation in the telecom sector, in our view. After the purchase of Orange Austria – the #3 mobile operator in Austria – by Hong-Kong-based Hutchison Telecom – the #4 player in that market – in 2013, two other in-market consolidation transactions are currently being reviewed by the EU Competition Commission. In Ireland, Telefonica’s O2 is being sold to Hutchison Telecom while Netherlands-based KPN is selling its German subsidiary E-Plus to Telefonica.
If those transactions were cleared by the anti-trust authorities – the decisions on Ireland and Germany are expected in Q2 2014 – we could see a new wave of consolidation aiming at reducing the number of mobile operators from 4 to 3 in markets such as Spain or Italy.
The fixed-mobile convergence also constitutes a powerful driver of M&A activity at the moment. In recent weeks, UK-based Vodafone bought Spain-based cable operator ONO for €7bn while in France the sale of the second largest telecom operator SFR by its parent Vivendi has created a noisy €17bn+ bidding war between two contenders, Bouygues Telecoms – a fixed and mobile operator in the domestic market – and France-based cable group Numericable.
In that context, access to cheap debt financing in size is a key success factor. For IG-rated companies such as Hutchison Telecom, Telefonica and Vodafone, this is a matter of financial optimization. For transforming deals or for HY companies such as Numericable or Italy-based Wind – see below for a detailed analysis of the company – access to capital markets is a make-or-break condition to executing a successful M&A transaction. In total, we expect that ca. €20bn of new HY bonds and leveraged loans could be issued in the coming weeks in relation with the current M&A activity in the sector.

-    At the same time, refinancing activity by telecom issuers should remain high. A lot of cable and telecom companies were among the first borrowers to reopen the HY market in 2010 and 2011, at a time when credit spreads and rates were higher. This year, the bonds issued by many of those groups become callable at their option at attractive levels, which should incentivize many of them to refinance in the HY bond market with lower coupons. Switzerland-based mobile operators Orange Switzerland and Sunrise, some subsidiaries of the pan-European cable giant Liberty Global, Belgium-based cable operator Telenet or Poland-based mobile operator Polkomtel, among others, are prime candidates for such refinancing exercises in the European HY bond market. Such refinancing activity in the sector will be magnified if the IPO market grows further for cable and telecom companies as the use of equity clawback provisions may provide newly-listed groups with the option to refinance some of their public debt ahead of schedule at a lower cost. Recent rumors of a potential IPO of Sweden-based cable operator ComHem and of Switzerland-based mobile operator Sunrise illustrate our point.

-    A new breed of telecom and media groups based in Central and Eastern Europe is also jumping on the European HY bandwagon. As those companies often benefit from top line growth and improving cash flow generation, they try to position in the HY market as more stable and predictable issuers than some of their Western counterparts despite some embedded EM risk in their credit stories. In recent months, Bulgaria-based telecom incumbent Vivacom, Romania-based cable group Cable Communications Systems, Poland-based mobile operator Play and TV group TVN and Serbia-based cable operator SBB all tapped the European HY market successfully. We remained very selective in that market segment as some of those issuers have limited operational and financial track record in their current form and/or face serious regulatory, competition and financial challenges. That being said, we continue to watch that space very carefully, as it may provide us with new attractive opportunities of the likes of TVN – one of our core positions in the Fund.