Telecom Italia's (TI) EURO700 million securitization of landline receivables may be a heaven-sent deal for telecom companies with augmenting corporate debt. As the doors in other markets slam shut, refinancing the billions of Euros funded in the unsecured bond markets will require the same innovation pioneered by TI's deal.
This first step for the Italian telecom promises to be one of many; with a EURO2 billion medium-term note program installed, market sources expect the company to return to market before year-end. Its promising reception has prompted other telecoms to follow suit. Royal KPN announced a EURO250 million issue in the works, while France Telecom and Telenor of Norway are designing programs of the TI magnitude, with intentions to launch a EURO2.4 billion and a EURO1.5 billion program, respectively.
Still, market analysts worry that the ABS alternative may not be enough to quench the magnitude of portfolio debt holdings, fearing that an over-abundance of securitizations might, in the end, leave companies facing the same deteriorating credit issues they face now in the bond markets.
Therefore, the question is, how much of a company's debt portfolio is reasonable to securitize? If it's a question of securitizing the debt that is presently on the books, it poses very little threat in respect to a possible credit downgrade, explains Anjali Bastianpillai, an associate director at S&P. With already highly leveraged books, turning to securitization would pose as an exchange of debt for better rates.
To be sure, TI's pricing on its securitization, though forced to widen because of perceived TI credit risks, managed to price well within its corporate bond spreads. The question of how much a company should securitize shouldn't be interpreted as a number that can be pinned down, adds Birgit Specht, debt research head of ABS at Dresdner Kleinwort Wasserstein.
While some analysts recommend securitizing no more than 20% of a company's debt portfolio holdings, the bottom line points to the individual company's needs because each company must decide how such an alternative will make economic sense. "Twenty percent is a figure I would not want to quote," said Specht. "You need to assess how the balance sheet is composed."
As each company individually enters the ABS arena there are potentially some variations that can work, sources say. One such alternative that has been put into play is the securitization of real estate assets.
British Telecom was in the market with a deal in June selling GBP2.3 billion of its property portfolio to Telereal Holdings Ltd., a joint venture between U.K. property Co., the Williams Pears Group and Land Securities Plc, who will securitize the holdings.
Beyond such straightforward deals are also ideas that aim to securitize a company's mobile or wireless receivables; or securitization of a company's rental receivables for its satellite signal receiving towers. However, implementing these alternatives would require much more work before coming to market explains Robert Patterson at Morgan Stanley Dean Witter (MSDW).
Deals with this structure, as reported in MSDW's European ABS Mid-year Review & Outlook, would have to first prove "stability, predictability and endurance of such receivables to obtain a rating that is high enough to make securitization attractive."
What's evident is that telecoms must design a program that offers the same variety that TI's medium-term note provides. Bastianpillai refers to the Italian deal as having a mixture of both the long-term and short-term market, adding that ideally a telecom would be better suited to securitize in the ABCP market.
Despite the ravenous appetite displayed by investors for short-term paper, the ABCP market has also been jaded by the long line of credit flops that have befallen the market. The recent trials of Lucent and AT&T minimize the choice for telecom issues going forward. "It's almost impossible for these companies to consider issuing straight unsecured CP," said Dresdner's Specht.
For France Telecom, designing a similar program like TI's securitization won't be as difficult and should not be as time consuming. The French securitization law, entitled FCC, will facilitate the term-note program, adds Specht.
Although telecoms promise to come in force onto the securitization stage, the path is long and TI's launch is only the beginning. "Telecom Italia has obviously gone out of the door with a term transaction and most of the major European telecom companies are looking to do some form of securitizations," said the S&P analyst. "Where that actually ends up in terms of whether they end up doing conduits or term market deals - most of them have not even progressed to that point.
"They are definitely looking at doing deals but that is as far as it goes at this point."