As downgrades make it difficult for European telecom operators to maintain their single-A status among investors, securitization is primed to become an even more attractive option, sources say.
It seems that the rating agencies are no longer prepared to wait for the end of the twelve-month grace period they granted telecom companies last year to clean up their balance sheet and execute an adequate debt-reduction plan.
Moody's Investors Service recently cut France Telecom's ratings from A1 to A3 while Standard & Poor's cut it down from single-A to single-A-minus. Similarly, Moody's changed its outlook on Deutsche Telekom's A2 rating to negative from stable. S&P put its British Telecom rating on negative creditwatch, which makes a downgrade of at least a notch likely in the near future. S&P cut Sonera's rating to single-A-minus from single-A and put it on review for a downgrade.
"Telecoms companies face enormous funding and refinancing commitments that could reasonably be mitigated by the securitization or sale of trade receivables, real estate, etc. This appears in many cases to be a significantly more attractive alternative to traditional corporate bond issuance", says Stephen Din, Managing Director at Morgan Stanley Dean Witter.
Telecom companies' real estate, trade receivables, and fixed lines networks are viewed as hot asset classes for this year. A number of transactions are expected to come to the market as telecom companies are rumored to be getting ready to securitize some assets, although none has appeared so far. Telecom Italia has been working on the securitization of its trade receivables for over a year now. The transaction is rumored to close in March, although it has been postponed a few times already.
Following the large borrowing carried out to finance the purchase of third-generation licences, European telecom companies have accumulated huge levels of debt. Debt burden has hardly fallen in the past year and the disappointing results of the Orange initial public offering (IPO) have eroded the hopes that it would be rapidly eliminated through asset disposals on the stock market.
Additionally, the sale of Europe's number-two mobile operator had been viewed as a crucial test of the telecom industry's ability to find cash to repay debt raised for acquisitions and UMTS mobile phone licences. Deutsche Telekom, BT Wireless and KPN also planned to float their mobile subsidiaries later this year.