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Top Financial News Thu, 19 Oct 2000, 3:14pm EST Telstra`s CyberWorks Link May Hurt Bond Sales: Rates of Return By Hamish Risk /Blomberg Sydney, Oct. 19 (Bloomberg) -- Telstra Corp. may have to pay higher yields on bonds to help fund Internet investments -- described as ``high-risk`` by Standard & Poor`s -- with a Hong Kong company that`s lost two-thirds of its value this year. Australia`s dominant phone company says it may need to sell debt to help fund the $2.4 billion investment in ventures with Pacific Century CyberWorks Ltd. by March. That may not be long enough to mend the company`s reputation among bond investors. The damage was done in April. Just a month after selling A$500 million ($260 million) in bonds to Australian investors, Telstra announced plans to invest in Asia`s biggest Internet company outside of Japan. Telstra bonds slumped as S&P reviewed, and then lowered, Telstra`s credit rating. It hasn`t helped that CyberWorks` stock lost 65 percent this year or that the world`s telephone companies flooded credit markets with more than $250 billion in debt in the first nine months to fund a new round of license auctions. ``The pricing is going to have to be very attractive before we have a look at it,`` said Alison Delaney, who helps manage A$4 billion ($2.1 billion) in bonds at Equitilink Ltd. ``Telstra will have to be more upfront and flexible with investors after their problems earlier in the year.`` Yields on Telstra`s March 2010 bonds blew out to as high as 87 basis points more than the benchmark swap rate in May, compared to 31 basis points before the CyberWorks` investment was announced. The yield was recently at 70 basis points more than the swap rate, used by the best-rated companies to borrow funds. ``Fair value for Telstra 10-year bonds should be 80 basis points over the swap rate,`` or 126 basis points over the comparable 10-year government bond, now 6.14 percent, said Delaney. Risky Telstra is seeking to expand its business in Asia, and particularly in data services, as rising competition at home erodes its earnings. Yet, its plans with CyberWorks are as bold as they`ll be expensive. Under terms renegotiated this month to account for the drop in CyberWorks` shares, Telstra will buy 60 percent of CyberWorks` mobile phone assets for $1.68 billion. It will pay $750 million for debt convertible into CyberWorks` shares and set up an Internet infrastructure venture that will try to borrow $2 billion. Credit rating agencies aren`t impressed. S&P put Telstra`s credit rating on review in April and in September it cut Telstra`s long-term credit rating to ``A+`` from ``AA`` and its short-term rating to ``A-1`` from `A-1+`` because of plans to invest in ``high-risk, mobile, Internet and data businesses in Asia`` and more competition in its home market. ``They`ll probably have to pay more for funds this time,`` said Gavin Goodhand, a fund manager at Deutsche Asset Management, which manages A$4 billion in fixed-income securities and cash. ``Whenever a bond performs badly, people tend to shy away from it for a while, or investors will demand a larger risk premium.`` Bad Timing Telstra`s funding needs come at a bad time. European telecommunications companies are lining up to sell bonds after splashing out billions of euros to buy licenses to operate new mobile phone services that allow high-speed Internet access. British Telecommunications Plc, Telefonica SA and France Telecom SA are expected to try to sell more than $20 billion of bonds by year-end. Deutsche Telekom AG, which sold almost $15 billion in June in the biggest single corporate bond sale, may yet revisit the market. Telstra wants to put off selling bonds as long as it can. It`s arranged two syndicated loans, giving the company access to up to A$4 billion at cheaper rates than the bond market at present, said Cliff Davis, corporate treasurer of Telstra Corp. ``We have bank facilities in place to cover our expansion, so we`ll only look to issue if market pressures have eased,`` he said. ``With our S&P rating now stable, I think we`ll be able to come back to the domestic market and issue by March next year.`` No Option It may have little other option than to sell bonds for longer term funding. Since it`s 50.1 percent-owned by the Australian government, it can`t issue new equity without legislation allowing the government to change its stake or buy new shares. Right now such bonds won`t find many eager buyers. ``We won`t be buying any Telstra bonds if they decide to issue -- their spreads are just too volatile,`` said Michael Morgan, who helps manage A$2 billion in fixed income and cash at National Asset Management Ltd. in Melbourne. Morgan said his fund bought Telstra March 2010 bonds when they issued but has since sold. It hasn`t helped that fund managers` most rosy expectations for the Internet`s growth have been clouded by the tumble in the share price of CyberWorks and other online pioneers. ``It`s hard to know what these companies will look like in a few years,`` said Mark Beardow, manager of credit at AMP Asset Management, which manages A$12.5 million ($6.7 billion). |
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