Details emerge on PCCW refinancing

As the details emerge about PCCW''s mammoth refinancing, it is clear that banks are more concerned about the management than the business of PCCW.

Size, security and a large dollop of fees ensured that PCCW's refinancing has crossed the first hurdle of securing a lead arranging and underwriting group. The five banks who are leading the deal - Barclays Capital, Chase, Mizuho Holdings, HSBC and Bank of China - now face the difficult task of closing general syndication before February 2001. That is the date when the original bridging loan, taken out by PCCW to finance its purchase of Hong Kong Telecom, is due to be repaid.

The new refinancing has been split into three tranches. The first is a $1.5 billion three year loan which is priced at 50 basis points (bp) over Libor. The second tranche is a $2.3 billion five year loan, priced at 75bp over Libor. The third is a $900 million seven year loan priced at 75bp over Libor. The costs reduce PCCW's monthly interest bill by $60 million from the bridging loan which was much more expensively priced.

The pricing of the new loan reflects the fact that the company is heavily geared up and is a first time buyer. Other Hong Kong utility companies are receiving five year money at less than 50bp - a historic low. But PCCW, with its huge debt and perceived riskiness needed to pay a higher spread to get the banks to commit.

PCCW also needed to offer a whole lot more security than it would have liked. The actual borrower is Hong Kong Telecom Company (HKTC) - a 100% owned subsidiary of PCCW. By lending straight to this company the banks are ring fencing the revenues of PCCW's Hong Kong telecom business. PCCW is not allowed to play around with the finances of HKTC by doing such things as awarding itself huge dividend payments or making HKTC sell assets and then taking all the proceeds. This level of security is rarely seen these days in Hong Kong's freewheeling loan market. Its inclusion shows that there is a level of concern among bankers over the management of PCCW.

Refinancing the refinancing

The thinking behind splitting the loan into three tranches is that it allows PCCW to refinance after year three with some longer dated paper - ideally a bond issue. The company is likely to seek a rating shortly after the completion of general syndication and then go to the bond markets when market conditions are right. This strategy of having a three year loan to finance the purchase of assets, which is then refinanced in the bond markets, was also successfully employed by France Telecom in its acquisition of Orange in the UK.

The main thrust of activity now will be to get a sub-underwriting group together of about 10-12 banks and then go for general syndication. The lead arrangers hope that because 31 banks took part in the original loan, the credit work and company familiarity will ensure that this syndication process will be smooth.

However, telecom companies are much less in vogue than they were in March 2000 and many banks will be more leery this time around. Many banks will have made many loans to many telecom companies and their credit committees might be sceptical about taking on more telecom risk. Moreover, there are two other big telecom loans in the market which could squeeze HKTC. The first is Hutchison 3G and the other is IPBC, which is PCCW's internet backbone joint venture with Telstra.

Some banks might scoff at just taking the spread on the loan given that fees for the arranging group are said to be in the region of 100bp. These fees are being paid upfront and won't reach the general syndicate level, according to sources. However, given that PCCW has annual Ebitda of over $1 billion, the credit should finance itself.