City Telecom rings in new year for Asian bond markets

Roadshows begin today for a debut high yield deal by Hong Kong operator City Telecom.

City Telecom is to launch the first high yield bond from the Hong Kong telecom sector with a $110 million deal led by Citigroup. Roadshows for the 10 non-call five issue begin today (January 6) in Hong Kong and Singapore, with one team moving to London on Friday and the other to Los Angeles. Presentations will continue in the US throughout the whole of next week, with pricing expected either late in the week or early the week after.

Although the transaction size is small, specialists say the company is keen to complete a fully marketed deal and make it a 144a offering rather than Reg S. Firstly, this is because it wants to target a US audience as it is listed on the Nasdaq as well as the Hong Kong Stock Exchange. But it also wants to establish its credentials as a serious player, keen to develop a long-term relationship with a core group of investors rather than fight for every last basis point.

The rating agencies have assigned the company a Ba3/BB- rating and investors say it has been discussing an initial indicative yield in the mid 8% range. Pricing comparables in Asia are relatively difficult as there are few true high yield deals from investment grade countries like Hong Kong and even less from the telecom sector.

The most frequent telecom borrowers hail from the Philippines and Indonesia, both rated non-investment grade. Ba2/BB rated Globe Telecom from the Philippines, for example, has a 2012 bond callable in 2007, which is currently yielding 7.35%.

From an investment grade rated country like Korea there is a July 2009 bond by Ba2/BB+ rated LG Telecom, which is currently yielding 6.346%.

More recently in December, Asia Aluminium completed a 2011 deal, which is now yielding 7.931%. The group has a Ba3/BB rating, one notch higher than City Telecom on Standard & Poor's side.

Globally, specialists cite high yield comparables from operators like Rogers Wireless of Canada. The Ba3/BB+ rated group has a 2015 bond outstanding at a yield of 6.749%.

In terms of leverage, City Telecom is moving towards the high leverage levels of operators like LG Telecom. At the time of its bond issue in July 2004, the Korean cellular operator was running a debt to EBITDA ratio of just under four times.

City Telecom reported a debt to EBITDA ratio of 0.4 times for the 2004 Financial Year ended August. However, the agencies project sharply rising debt levels, which may peak of four times before starting to decline again from 2006. Moody's says that any level above 4.5 times over the next two years may provoke a ratings downgrade, while any level below three times may prompt an upgrade.

Proceeds are being used to fund City Telecom's HK$1.5 billion ($192 million) capital expenditure programme and expand its FTNS network (Fixed Telecom Network Services). This is a metro ethernet network, which consists of a fibre optic network to each building and then copper cabling to 1.2 million individual households.

The company offers fixed line, broadband and pay-TV services through the network, putting it in direct competition with PCCW-HKT, the Territory's dominant operator. The two companies share fairly similar business models since neither holds a cellular license and no other Hong Kong telco has a complete end-to-end alternative network.

Hutchison Global Communications and New World are somewhat similar since both run pure fixed line networks. Wharf also operates a pay-TV service via sister company i-Cable and has said that it is looking at offering telecom services via the latter.

City Telecom started life as an IDD operator in competition with PCCW-HKT and has since mutated into fixed line (2002), pay-TV (2003) and broadband-based calls via VoIP (2004). Analysts consider the company one of the most innovative, albeit volatile, players in Hong Kong's highly fragmented and fiercely competitive telecom sector.

It currently has a 21% market share in IDD, putting it second to PCCW-HKT and while revenues are declining they remain the backbone of its cashflow, accounting for over 60% of 2004 revenue - HK$1.17 billion revenue ($150 million) for the whole group.

In the fixed line sector, City Telecom has a 7% market share compared to close to 70% for PCCW-HKT. In the broadband sector, it has a 16% market share, compared to just over 50% for PCCW-HKT and 20% for i-Cable.

Analysts say broadband offers the greatest growth potential in Hong Kong's saturated telecom sector and City Telecom hopes to increase its coverage to 1.9 million households by 2009, giving it a 25% market share.
Hong Kong also has the world's second highest broadband penetration rate (over 50%), second only to Korea.

S&P concludes that the main challenges City Telecom faces are its small size and relatively weak market position, alongisde the execution and financial risks associated with its expansion plans. Balancing this, it says that the company's fibre optic network gives it a strong competitive advantage and that it maintains a good liquidity position, with a policy of maintaining a minimum cash balance of HK$200 million ($26 million).


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