Just two years back, telecom receivables were hailed as the harbinger for European corporate securitizations, though the sector's implosion has stymied activity.

Leverage has become the focal point for telecoms, and market participants are looking at ways to address it. Peter Plaut, managing director and head of European credit research at Banc of America Securities said, "Rating agencies only give modest credit to asset securitizations and at some point you loose the cash benefits that help in producing modest cash flows. It's certainly not an effective method for long-term debt reduction because it's not fundamentally attacking the problem. At the same time you end up giving up future benefits."

"These transactions are of modest size. [Between] E500 million and E1 billion in asset securitization does not go a long way toward reducing debt or improving credit quality." The impetus, he said, for soothing the current economic crunch in the European telecom industry is consolidation and debt reduction.

In his report on the telecom industry, Plaut says that following a number of rights issues, asset sales, jumbo-sized bond deals, and a focus on debt reduction, cash generation and margin improvement have dramatically improved the liquidity position of the major operators. With the exception of Deutsche Telecom and France Telecom, said Plaut, almost all of the operators can meet their debt obligations from 2002 to 2004 without having to tap the capital markets - an aspect that deterred Telecom Italia's plans to come to market this year (see ASR 7/15).

However, the incentive for tapping into securitizations is still strong, especially for investors, because these companies have the right assets in terms of quality and stability. For the issuer, securitization offers a cheaper cost of funds, as well as diversifying the issuer's funding sources. The benefits include: easier access to capital markets than bank markets; marginal cost advantage; and the access to a large amount of capital over a longer period.

TI, for example, secured cheaper financing through its term securitization completed June 2001 relative to its previous corporate bond issues, which priced at 87.5 basis points over the benchmark compared to the 27 basis points on the securitization.

Anjali Bastianpillai, Associate Director at Standard & Poor's said: "It's often a question of volume and when you consider fixed line billed and unbilled receivables which are eligible it's not a huge volume. The advantage of a telecom receivables securitization is that there is no concentration - you are talking a huge customer base. But from a systems perspective you have to be able to track millions. In the TI deal it's about 21 million - so, adapting systems accounts and tracking performance for a term deal can be very costly."

Further telecoms also have a number of bank accounts due to a large customer base and millions of receivables, which cannot be readily assigned to an SPV or innovated in the name of the SPV. This creates a commingling risk or a liquidity stress to the cash flows in the insolvency scenario of a company.

"Telecom companies are still considering structuring term deals but often future flow, factoring and small volume trade receivables transactions end up in conduits because the cost of setting up a term trade receivables transaction is economically not feasible in the long run," said Bastianpillai. "Term trade receivables are like single seller conduits and can be operated that way."

But, says another analyst, future issues from TI may potentially grow by including a mix of small and large companies, in addition to the residential customers in its present deal. "Among the big names, the only others are Telefonica and British Telecom (BT) that are in positions to set up ABS transactions, based on their commercial receivables as opposed to others which are now facing more ratings constraints and negative market perception."

Deals in the pipeline

BT has been the only other telecom to access the securitization market but it was a securitization of a 30-year rental income stream from assets that are critical to the UK fixed line network and was rated as a whole business securitization (see ASR 7/22).

From a ratings agency perspective, the UK insolvency regime allows the structuring of certain transactions that could not be replicated outside the UK. However, it could be considered outside the UK - provided the right structure and the existence of laws within the relevant jurisdiction would mitigate the usual insolvency risks.

On the billed and unbilled receivables end, markets sources said that a deal is currently being prepared for Ireland-based telecom, Eircom, that is expected to be released sometime next month. Sources close to the transaction declined to comment.

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