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Telcos Debt raising Efforts Being Affected by Sovereign Debt Crisis

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The favourable pricing that Netherlands based telco, KPN managed to get on its benchmark Eurobond compared to peers in southern Europe highlights the stark disadvantage faced by corporate issuers in countries where sovereign concerns prevail, says Fitch Ratings.

KPN's 10-year transaction priced yesterday at 195bp over mid-swaps. This contrasts with the 300bp spread that Spain's Telefonica paid just two weeks ago. Not only is the Spanish incumbent telecom operator rated higher than KPN, but the maturity of its deal was shorter at only six years.

Fitch added that it seems that sovereign risk will continue to play an important part in differentiating how these companies fund themselves.

The fact that both companies could tap the Eurobond market shows that investor appetite remains for corporate credit in a sector, which despite pressures on a number of fronts, continues to offer relatively good cash-flow visibility. Recent actions taken by both companies to curb distribution policies in order to preserve cash flow, protect credit metrics and ultimately defend ratings, show a deference to bond investors. Fitch has previously considered distributions at both these companies as particularly shareholder friendly. Recent actions have however shown that issuers are prepared to use this lever to preserve cash when needed.

While these issuers are quite different in terms of both scale and geographic breadth, they both exhibit a common need -- they both require regular access to debt markets.

High debt levels at incumbent telecom operators mean most must regularly tap the bond and other debt markets. Foremost among these are Telefonica and Telecom Italia.

TI, for instance, has EUR4bn- EUR5bn of debt maturing annually over the next few years. Existing liquidity means not all of this debt needs to be refinanced. Nonetheless, TI financing costs are likely to be higher than many other large European incumbents because of its weaker credit profile, location and large refinancing requirements.

Fitch concluded saying that the successful placement of both the KPN and Telefonica transactions is a positive sign of investor appetite for the sector. But it also highlights the funding disadvantage that an issuer can face simply by virtue of its head office location - something that takes little or no account of the geographic reach or relative credit strength of the underlying businesses.

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Tags: telefonica  fitch ratings  kpn  telecom italia  Netherlands