Why GEM has got its fists up: KS Lo, Asiamoney, June 2000
1 June, 2000Paul Keating, telling it like it should have been: Asiamoney, July 2000
1 July, 2000BOX 2: PCCW’s DEBT
There is no escaping the fact that PCCW has taken on a brutal level of gearing – in a rising interest rate environment – and the media has perhaps picked on the company more for this reason than any other. But analysis of the data suggests no reason to think the company will go under because of it.
The mechanisms of PCCW’s debt work like this. The loan it raised for US$12 billion consisted of two tranches: a 90-day $3 billion facility and a second tranche due 180 days after being drawn down, or on February 28 2001 if that is earlier. US$3.6 billion of that second tranche can be extended to February 2003. The loan was raised because the total cash outlay of the merger is US$11.3 billion. Contrary to popular opinion, that figure does not change regardless of which of the two takeover alternatives is used.
Set against that, Telstra’s commitments through its strategic alliance amount to US$3 billion, half of it for a six-year convertible note. PCCW says it has also secured a further US$3 billion cash from PCCW and C&WHKT, leaving a level of US$6 billion.
“We have always had an idea of the sustainable amounts of debt the company can carry in to the long term,” says Allen. Are they far beneath the limit? “We will be within the guidelines we have established.”
PCCW says it is in discussions with banks to refinance the loan, and says it is being shown spreads in line with a single A-rated corporate, which should equate to about 60 to 80 basis points over Libor. The loan carried a rate of 115 basis points over, so a refinancing would result in a major saving in interest payments. The biggest challenge to the company would be timing market sentiment.
A swift refinancing would be good news for the company since it faces heavy costs ahead. Dresdner has estimated that 37% of 2001 earnings will be diverted to interest payments, while the company faces the prospect of an expensive 3G telecoms licence for its mobile business as well as the heavy cost of infrastructure and content development for NOW.
There are several businesses PCCW could spin off it it fell short of cash – the mobile JV with Telstra is the most obvious – although there will also be a lot of new PCCW equity coming on to the market this year. Cable & Wireless has announced its intention to unload 4.9% of PCCW-HKT within three months of the merger and has the right to sell 7.4% more when a lock-up expires in February 2001.
But even if PCCW found itself with the worst combination of bad fortune – with bad market sentiment preventing a bond issue, floods of new equity diluting the share price and even a no-show from Telstra – we can’t help but feel the company would be fine. PCCW secured US$20 billion in commitments for that famous loan, underpinned by the strength of HKT’s assets. If there is one thing that this whole experience has shown, it is that there are plenty of banks that want to stay friendly with Pacific Century.
