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PCCW rules out bond issue
Reuters

PACIFIC Century CyberWorks (0008) has no plan to issue bonds as part of a US$6 billion (HK$46.8 billion) refinancing programme for debt taken on in its acquisition of Cable & Wireless HKT.

``Issuing bonds is not in our debt-raising plans for the near to medium term,`` said PCCW group treasurer Michael Verge.

The company has confirmed it would seek to refinance half of the US$12 billion it borrowed to fund its US$28.5 billion takeover of C&W HKT - Asia`s biggest-ever buyout.

Some US$4.875 billion would be raised at the PCCW-C&W HKT level, while US$1.125 billion would be debt for its Internet joint venture with Australia`s Telstra.

The amount is more than the US$4.4 billion analysts had identified as the minimum PCCW would have to refinance after taking into account cash reserves and an injection of funds from Telstra.

Mr Verge said the company would seek bank facilities for the refinancing and had already had a strong response from banks.

Banks had oversubscribed the initial US$12 billion loan by four times, he said.

PCCW shares have been pummelled over the past week, sinking some 25 per cent in a plunge triggered by the sale of one billion shares by Cable & Wireless, which had taken some PCCW equity as part payment for C&W HKT.

The sale switched investors` focus to the risks and away from the possibilities of 33-year-old Richard Li Tzar-kai`s Internet vision. PCCW stock stood at $8.70 at Friday`s close, some 69.5 per cent below its February high of $28.50.

The company is to announce its interim results on Thursday, the first since PCCW took over C&W HKT in August.

PCCW`s aggressive leveraging is a particular worry.

``The [merged entity`s] debt burden has raised the risk relative to what Hong Kong Telecom would have been before the merger,`` said Standard & Poor Asia-Pacific corporate ratings managing director Robert Richards.

PCCW is paying interest of about 8 per cent on the US$12 billion it borrowed to acquire the largely debt-free C&W HKT.

``The question is whether the banks decide the risks and pricing levels and the concentrations in the telecoms sector require (PCCW) to look to alternative funding methods,`` said Mr Richards.

PCCW has appointed bankers at JP Morgan and Morgan Stanley Dean Witter as ratings advisers, raising speculation in the market that they may be looking at a possible debt issue, although PCCW denies this.

Mr Richards declined to comment on any potential rating S&P might be preparing for PCCW, or on the way it would be classified - Internet firm or telco.

Internet firms are typically below investment grade, in the BB to B-minus category, which indicates a high risk.

Telecom firms, while mainly investment grade, have been downgraded recently, especially in Europe, as the risks and recent huge costs of third-generation (3G) mobile telephony have hammered credit profiles.

25 September 2000 / 02:22 AM

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It`s NOW or never for CyberWorks, says Worldsec report
Staff reporter. Hong Kong iMail

DESPITE the positive cash flows Cable & Wireless HKT brings to Pacific Century CyberWorks (0008), the success or failure of the company created by Richard Li Tzar-kai ultimately will depend on subsidiary Network of the World (NOW), according to a recent research report by Worldsec International. While many analysts agree PCCW`s interactive media service has great potential, it still has a long way to go before investors will feel comfortable with it.

The main problem PCCW faces with NOW is developing content.

In the report entitled What NOW, Worldsec says: ``Not only will it have to source attractive broadcast content, it will have to integrate interactivity and do it for multiple markets with vastly different languages and cultures.``

The report says even if PCCW succeeds in developing content for NOW, unforeseen technological changes could lead to unplanned and potentially unaffordable demands upon cash.

``NOW has to maximise its first-mover advantage by getting its content right the first time to achieve a critical mass of cable partners and subscribers. Failure to do so will leave it vulnerable to competitors,`` the report says.

Worldsec believes the fair value of PCCW is $10.50 per share and adds a fall below $8.70 would be a ``rare opportunity`` to buy for the longer term.

The valuation was arrived at by calculating earnings before income tax, depreciation and amortisation (Ebitda) multiples of comparable companies and applying them to the different divisions of PCCW. Worldsec said PCCW`s four core components (NOW B2C, B2B/Data Centres, IP Backbone and Regional Wireless) are expected to develop and expand substantially as CyberWorks gradually achieves key targets. ``Those would include deals with local owners and content providers, proven uptake of NOW, and spin-off of IP Backbone and Wireless businesses,`` the report says.

Other issues also need to be addressed such as the stock overhang from the Cable & Wireless stake which is now down to 14.2 per cent, NOW`s ability to provide content to the China and Indian markets, and the ability to provide a credible regional mobile platform.

``We are also aware of the counter`s tendency to exaggerate Nasdaq movements, meaning that any decline in the index could see a larger decline in PCCW`s share price,`` the report says.

25 September 2000 / 02:23 AM
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Reality Bites Into PCCW Debt Plans

HONG KONG, Sep 24, 2000 -- (Reuters) Reality has taken a big bite out of the fanciful Internet vision of Pacific Century Cyberworks (PCCW), but the firm`s sinking share price may merely be a prelude to a prospective pounding by debt market investors.

Analysts say a debut bond by an unproven company in a sector set to flood markets with some USD 50 billion of paper by the end of the year makes for a very hard sell - and a hefty coupon.

"The equity markets are not very kind to PCCW at the moment. I don`t see why the debt markets should view it any differently," the head of fixed income research at a U.S. investment bank, who declined to be identified, said.

PCCW is widely expected to issue bonds as part of its plan to refinance USD 12 billion it borrowed to pay for its USD 28.5 billion takeover of Cable & Wireless HKT - Asia`s biggest ever buyout.

But without a credit rating, worries about the drain on cash flow its Internet businesses will have on telecom revenues, how it will cover its debt and fund future expansion, analysts are wary of the prospects for a debut issue.

"Equity analysts can discount cash flows out for eternity, but a fixed income analyst can`t. If PCCW can`t satisfy on cash flows it`s very difficult to see how bond investors are going to be able to buy it, even with a big coupon," the head of fixed income research said.

PCCW shares have been pummeled over the past week, sinking some 25 percent in a plunge triggered by the sale of one billion shares by Cable & Wireless Plc , which had taken some PCCW equity as part payment for C&W-HKT.

The sale switched investors` focus to the risks and away from the possibilities of 33-year old Richard Li`s Internet vision.

PCCW stock stood at HKD 8.70 (USD 1.11) at Friday`s close, some 69.5 percent below its February high of HKD 28.50.

The company would announce its interim results on Thursday, the first since PCCW took over C&W-HKT in August.

AGGRESSIVE LEVERAGE

PCCW`s aggressive leveraging is a particular worry.

"The debt burden that the merged entity has certainly has raised the risk relative to what Hong Kong Telecom, with its more conservative financials, would have been before the merger," Robert Richards, managing director of Asia-Pacific corporate ratings at Standard & Poor`s, told Reuters.

PCCW is paying interest of about eight percent on the USD 12 billion it borrowed to acquire the largely debt-free C&W-HKT.

A PCCW spokeswoman on Friday told the Loan Pricing Corp, a Reuters company, the firm would seek USD 6 billion of refinancing.

Some USD 4.875 billion would be raised at the PCCW-C&W HKT level while USD 1.125 billion would be debt for its Internet joint venture with Australian telco Telstra Corp .

That is above the USD 4.4 billion analysts had identified as the minimum PCCW would have to refinance after taking into account cash reserves and an injection of funds from Telstra.

Bankers expect further details in the coming two weeks and say facilities may be divided into three-, five-and seven-year tranches, with one tranche denominated in Hong Kong dollars.

"The question is whether the banks, which have been very competitive to date, decide that the risks and pricing levels and the concentrations in the telecom sector requires (PCCW) to look to alternative funding methods," Richards said.

Debt market players say a bond is certain, especially as PCCW has appointed bankers at JP Morgan and Morgan Stanley Dean Witter as ratings advisers and a rating would be vital to a bond issue.

RATINGS OUTLOOK UNCERTAIN

Less certain is the level at which its paper would be rated.

Richards declined to comment on any potential rating S&P might be preparing for PCCW, or on the way it would be classified - Internet firm or telco.

Internet firms are typically below investment grade, in the BB to B-minus category, indicating high risk.

Telecom firms, while mainly investment grade, have been downgraded recently, especially in Europe, as the risks and huge costs of third generation (3G) mobile telephony have hammered credit profiles.

A source close to the ratings advisers told Reuters that PCCW would be "very disappointed if it didn`t make investment grade".

Supply risks also loom large.

Some USD 50 billion dollars of telco bonds from Europe alone are expected to hit the market by the year end, while within the region, Telekom Malaysia is expected to raise USD 300-400 million with a global bond issue later this month.

The BBB-rated firm last raised a U.S. dollar bond in 1995, when it issued USD 200 million worth of 10-year paper and paid 72 basis points (bps) over comparable maturity U.S. Treasuries.

Today the bonds trade at a spread of about 230 bps over, a level some market sources say PCCW would be lucky to achieve.

"Even without the supply risks, it`s a difficult time for PCCW to be coming to the market," the Asia head of fixed income analysis at a European bank said.

"To soak up that kind of issuance, telecom companies are going to have to try to tap equity-type investors and these are exactly the same people that have been hammering PCCW. It`s a very tough call," he said.

(C)2000 Copyright Reuters Limited. All rights reserved. Republication or redissemination of the contents of this screen are expressly prohibited without the prior written consent of Reuters Limited.

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25 Sep 2000

CyberWorks could infect market
Further falls could bring liquidity problems and derail a market rebound

SOME of the minders at Singapore Telecoms must have watched
the bloodbath over here last week and said: "See, why didn`t you take up our offer when we were prepared to pay you good money for your dinosaur Cable & Wireless HKT."

Indeed, it would be hard to blame those at SingTel for having the last laugh. Less than two months after Richard Li`s Pacific Century CyberWorks triumphantly took over HKT with the young tycoon declaring he wants to double the company`s value, CyberWorks shares went the other way instead, losing almost half its value.

After becoming CyberWorks` second largest shareholder by snubbing SingTel for CyberWorks, C&W plc clearly hasn`t done too well either, having dumped its first 4.9 per cent stake of CyberWorks shares at below HK$10 apiece. Despite the completion of the share placement on Wednesday, CyberWorks shares continued to slide, easing to a low of HK$8.30 at one point and taking the entire Hongkong bourse down with it.

Now it seems the market is determined not just to penalise those who put their faith in CyberWorks, it seems intent on brutally punishing the entire Hongkong investing community as well.

That, of course, is a bit of an exaggeration. But it is true any further fall in CyberWorks` share price could pose serious and bigger problems to the entire bourse. As one of the biggest capitalised companies, CyberWorks` massive selloff has already done serious damage to investor confidence and produced a rippling effect on other blue chips as well as technology and telecoms counters.

Last week when CyberWorks` shares suffered massive losses, the Hongkong market recorded one of the biggest drops in recent months, with the Hang Seng Index plunging 1,636 points or 10.1 per cent to close the week at 14,612.

Besides denting market confidence, there could be other troubles. As one broker pointed out, if CyberWorks continues its free-fall, it could bring liquidity problems to the market, which will derail any market rebound.

Combined with the oil crisis as well as the liquidity squeeze from impending massive share sales of MTRC and Sinopec, the Hongkong market could well be in for further beating.

Meanwhile, we all know the damage that has already been done to the Growth Enterprise Market which saw its index traded to a year`s low of 385 last week.

Such a negative mood could also give strategic sellers, especially hedge funds from the US, an excuse to attack the Hongkong bourse. Little wonder that CyberWorks chairman had to do a little Dr Mahathir last week by pointing his finger at speculators.

Further, the sharp loss of confidence in the share price could make financing and refinancing difficult for CyberWorks which has lined up ambitious plans for its global Internet network as well as major projects such as the CyberPort -- not to mention refinancing the takeover deal.

When asked by BT last week, officials from Standard & Poor`s, which does not have debt rating for CyberWorks, were trying hard not to be offensive when it raised concerns about the company`s ability to fund its future expansion. Indeed, how is the year-old Internet company with substantial debts and an untested business model going to convince buyers should it want to issue fixed-income paper in the near future? CyberWorks could end up draining its cash cow HKT if it cannot tap money easily from the capital markets.

Another immediate problem for CyberWorks is the remaining 15 per stake which C&W plc is still holding. Having lost heavily on its first portion, will the C&W board risk allowing the value of that portfolio to slip further or will it cash in once it is allowed to do so? Under the takeover agreement, the British telecom giant will be able to sell them in tranches at six-month intervals, creating what one analyst calls a nasty overhang on the shares in the months ahead. CyberWorks` interim results this week may produce added pressure.

In the week ahead, the usual optimists who recently predicted index targets of up to 20,000 are calling for a technical rebound, helped by the US decision to release its strategic oil reserves and Wall Street`s late recovery last Friday. Investors and analysts caught flatfooted by the market slide are now desperately talking up the market, saying that the panic selling should soon stop and there are still some positive factors in the tech sector. Chartists are also pointing to all the oversold indicators.

All said, this had better be the week of a rebound with the likes of Cheung Kong, China Mobile, Hutchison Whampoa and even CyberWorks leading the recovery. A failure to do so would certainly send the troubled index into uncharted territory.

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PCCW strategy is questioned
By Joe Leahy
Published: September 24 2000 22:00GMT | Last Updated: September 24 2000 22:07GMT

Network of the World, the multimedia website produced by Hong Kong telecoms group and internet investor Pacific Century CyberWorks, invites visitors to "grab a plasma gun" and try their hand at vaporising each other on one of the site`s game servers.

Unfortunately for PCCW, its investors are focusing their own armoury on the company`s share price.

Since early August, heavy selling has slashed more than 50 per cent from PCCW`s value, turning September into a time of reckoning for a company that had used its soaring value to pursue its global media ambitions.

Investors are questioning PCCW`s much-vaunted strategy of becoming a pan-Asian provider of internet and broadband infrastructure and content. Analysts are squabbling over what its fair price should be and there are concerns over the impact of recent expansion on its future cashflow and debt burdens.

More worryingly, speculation is mounting over whether the network of deals that underpin PCCW`s internet vision will begin to fall apart.

The biggest concern in the short term revolves around whether a $1.5bn convertible loan note to Telstra, the Australian telecommunications company, will be renegotiated.

"The market is finally reverting to rational analysis and beginning to recognise how much PCCW has in common with British Telecommunications. Both are former monopoly utility companies, both adapting to the internet age, both with media interests, and both highly indebted," says David Webb, editor of webb-site.com, an independent corporate governance watchdog.

PCCW`s share price woes began with the collapse of a proposed joint venture with CMGI, the US internet holding company. This was followed by the scrapping of a three-way content and distribution agreement with Gigamedia and ERA Communications, two Taiwan-based companies.

The slide continued last week when Britain`s Cable and Wireless sold a 4.9 per cent stake in PCCW valued at around $1.3bn, for HK$9.88 a share, an 8 per cent discount to the prevailing market price.

The stake was part of a larger 20.2 per cent holding acquired when C&W sold its Hong Kong arm, Cable & Wireless HKT, to PCCW last month. PCCW shares closed at HK$8.70 last week, 50 per cent lower than its recent high of HK$17.70 on August 7 and 70 per cent below its record high of HK$28.50 in February.

Company sources blame short-selling by hedge funds ahead of the well-publicised C&W stake sale for much of the poor performance.

"The way the shares were placed has not been executed very well," said a senior company official. "At the end of the day, it has invited in a lot of hedge funds."

But some analysts say Cable and Wireless has fared better than some feared, despite selling the shares at a discount. PCCW paid for HKT with cash and shares.

Under the offer, HKT shareholders who opted for the cash and shares option received HK$7.23 cash plus 0.7116 PCCW shares for each HKT share.

Based on this formula, C&W received a reasonable price in Wednesday`s sale of the equivalent of about HK$14 per share per HKT share, said Kingston Lee, assistant director of Schroders Investment Management (HK).

This was within HKT`s average trading range over the past few years. "They`re at the bottom end of the scale but they haven`t lost their shirt," says Mr Lee.

The problem for PCCW is how its sagging share price might have an impact on deals such as the Telstra convertible bond, said David Ferguson, telecoms analyst with Nomura International.

The bond was to be convertible at HK$23.69 but this was changed to HK$19.52 last month. Under pressure at home, partly because of PCCW`s woes, Telstra may want to renegotiate again, though PCCW insists the talks are on track.

"Telstra could even end up walking away from the whole thing," says Mr Ferguson. If the deal failed it would add to PCCW`s $4.8bn in debt, which the company is still seeking to refinance.

PCCW says its other debt will be refinanced with conventional bank loans and said that negotiations are proceeding well.

"The fundamentals of the company remain on track," says Richard Li, PCCW`s chairman and chief executive. However, staying afloat will not be enough. C&W is scheduled to sell a further 7.5 per cent stake in PCCW next February.

In addition, institutional investors are getting impatient for PCCW to start showing returns from its technology-focused strategy.

Network of the World, the interactive broadband internet and television site, is the main focus for critics.

"The NOW project has not been too well received," says Schroders` Mr Lee. "They need to produce results." Until that happens, Mr Li can never be sure when investors are going to put down their plasma guns.

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