Dacom launches roadshows

Second Korean telecom operator approaches Asian high yield market.

Dacom Corp, Korea's second largest fixed line operator, began roadshows in Hong Kong yesterday (March 15) for a debut international bond deal. The group is hoping to raise up to $300 million from a five-year deal led by Credit Suisse First Boston.

Roadshows will continue in Singapore today, before returning to Hong Kong on Wednesday and then onto to Europe and the US. Pricing is expected in the middle of next week.

Investors have said that they have heard the bond will carry one mid double B rating and one low double B rating. If correct, this will place Dacom in a slightly weaker ratings position than its two main benchmarks LG Telecom (LGT) and Hanaro Telecom.

Cellular operator LGT is a sister company of Dacom, which is 30.5% owned by LG Corporation and 10.6% by Samsung Group. LGT has a BB+/Ba2 rating and a $200 million 8.75% September 2009 bond outstanding.

One week ago, before the recent high yield sell-off, the deal was bid at around the 6.2% area. It is currently trading around the 6.5% area.

Hanaro Telecom, a rival to Dacom in the broadband space, is rated Ba2/BB. In late January the group completed a highly successful $500 million seven-year deal. It was priced at 99.32% on a coupon of 7% to yield 7.125%. This equated to a launch spread of 314bp over Treasuries.

Last week the deal was trading around the 6.7% area. Today it is back to 7% again.

Fund managers say Dacom is being pushed as a de-leveraging story and a company, which does not have the same capex burden as Hanaro, SK Telecom or KT Corp. Between 2002 and 2004, the company reduced consolidated debt by Won700 billion and unconsolidated debt by Won500 billion. This has bought overall debt down to Won1.6 trillion on a consolidated basis and Won1.1 trillion on an unconsolidated basis.

The company now reports a consolidated debt to EBITDA ratio of 2.4 times and unconsolidated ratio of 3.7 times. Both the operating company (Dacom) and its main subsidiary (Powercomm) are expected to remain free cash flow positive this year, helping the company to de-leverage further. Proceeds from the new bond deal are being used to re-pay debt.

In its ratings release for Hanaro, Moody's said that it would consider lifting the company's rating if it could keep debt to EBITDA below two times on a sustainable basis. Dacom also helps to get below this level by next year.

In terms of growth, company management have told investors the group wants to make a big push into the retail broadband space once its license becomes operational in the second half of the year. Dacom's key asset is Powercomm - a national cable network across which both Hanaro and Thrunet have been providing broadband services to retail customers. Dacom hopes to entice the highest ARPU customers away from them and is targetting one million subscribers within a three-year timeframe.

Dacom currently derives 45% of its revenues from telephony services and 45% from leased line and corporate broadband services in which it has a 32% market share. Fourth quarter operating profit amounted to $5.4 million

But the key questions for investors will be what impact WiBro will have on the Korean telecoms sector? Korea is set to become the first country worldwide to install a national WiFi network that will allow computers to roam away from a telephone socket in the same way that mobile phones currently do.

SK Telecom, KT Corp and Hanaro have all acquired WiBro licenses and committed to spend $1 billion each to develop a network later this year. If they are successful they will effectively kill the fixed line broadband network of a company such as Dacom and leave it completely marginalized.

However, the company's supporters say the technology remains untested. One also adds, "WiBro is still very much an equity story and from a debt investor's perspective, the capex burden is huge. Investors are going to say, show me the money?"

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