A desperate need for cash leads France Telecom, Telecom Italia to securitize

European telecom companies are coming up with a new way of raising the cash they go through in a nanosecond: securitzing their customers' bill payments. But while the asset-backed debt may help the telecoms, there's just one problem: What will it do to the status of some of their other, unsecured credit?

France Telecom SA and Telecom Italia SpA are among those exploring the newfangled securities, a move driven by the need to reduce their gargantuan debt load, build their cellular networks, and expand internationally.

A number of European investment banks, including WestLB, BNP Paribas and Finanziaria, an Italian boutique, are working on the deals. "A lot of the banks around here are pumping it as much as they can," said Duncan Warwick-Champion, head of Standard & Poor's telecom group in Europe, in reference to the efforts at selling the phone bill-backed securities. "They see it as another source of revenues."

Both France Telecom and Telecom Italia are planning debt offerings that would be backed by the steady stream of bill-paying customer revenues. As in other asset-backed structures, those revenues would be segregated into another entity that would issue the debt. Such a technique likely would not affect the company's credit rating.

But it could mean that the credit ratings of unsecured debt would be affected, S&P's Warwick-Champion said. "The concern for us is that by securitizing a lot of the valuable assets, effectively putting a ring-fence around those valuable assets, if you were to move to a distressed scenario, a true bankruptcy scenario, then clearly those assets would not be available for the unsecured creditors," he explained.

That's a problem. The debt load of many European telecom companies soared last year as companies spent billions of euros bidding for third-generation cell phone licenses being auctioned by governments across Europe. Last fall European regulators gave notice that they were watching the issue carefully and were concerned about the level of telecom debt. In December, the Financial Services Authority, the bank regulator in the U.K., warned that banks must have strong risk management systems in place and be wary of concentrating exposure within one industry.

By taking on such securitized, and thus less risky, telecom debt, banks might allay regulators' concerns. Alternatively, proceeds from the securitized debt, which would carry a lower interest rate than the bank debt and bonds previously issued, could be used to pay down the more expensive bank debt.

European telecom companies have been soaking up the debt over the past year to get the cash they need to continue building their networks, including the costs of cellular licenses being auctioned by European governments. They also need to expand their reach internationally.

But the debt markets have cooled, and the once-friendly equity markets are closed to all but the best companies. Even some of Europe's blue-chip telecom companies are having trouble raising equity.

Indeed, France Telecom's difficulties in the equity markets shed some light on its plans to securitize. The company had hoped to raise somewhere between $70 billion and $80 billion by floating part of Orange Plc, the U.K. mobile phone company it purchased from Vodafone last year. But when the deal came to market several weeks ago, France Telecom has set the price range between $10.80 and $12.70 a share, putting the price for Orange between $52 billion and $61 billion. That's a decrease of 20% from the amount analysts had expected Orange to bring several weeks earlier.

Given France Telecom's need to pay for its investments in new cellular technology, establish an international footprint and provide some relief to its approximately E60 billion debt load, the company had no choice but to issue the equity, which depressed the price it could fetch.

In addition to France Telecom, Telecom Italia has plans to sell up to E1 billion as debt securities backed by its revenue from customers' bill payments. Telecom Italia is also carrying a huge debtload, in part due to its hostile takeover by Olivetti SpA in 1999.

While European telecom companies seem to be jumping on the bill securitization trend, little activity has been seen in the U.S. so far. However, with the equity markets still quite unapproachable, and with telecom companies continuing to be in need of capital, it isn't a stretch to expect companies to consider customer bill securitizations.

"Whether they go that route or not, they will at least look into it," said Ellen Welsher, director of S&P's new assets group.

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