Merrill Lynch bullish on Asian telecom bonds

Merrill Lynch predicts 3G costs will weigh less on Asian telecoms than on their European counterparts, boosting the relative value of Asian telecom bonds.

Asian telecommunications company bonds could outperform those of their European counterparts as their credit ratings are unlikey to be as dented by high third-generation license costs, according to a report by Merrill Lynch.

European telecommunications companies including British Telecom, France Telecom and Deutsche Telekom have seen their credit ratings drop after they paid high prices for European 3G licenses. Third generation licenses allow higher data transmission rates than existing second-generation standards.

"You're not buying the same credit story in Asia as you are in Europe," says Jason Carley, head of fixed income credit research at Merrill Lynch in Hong Kong. "Even in Korea, Hong Kong and Australia, where demand for 3G will be higher than other areas in Asia, the prices won't be anything like what they have been in Europe."

That's because unlike in Europe, where the big telecom companies are striving to build pan-European networks, and therefore need to win 3G licenses in each country, regulatory constraints on ownership are likely to limit the ability of Asian carriers to build networks than span Asia. In addition, many telecom companies are focussing on enhancing their 2G networks, where there is still potential for growth.

"The affordability of telecommunications services in the less developed Asian markets makes 3G almost irrelevant," Merrill's report says.

There will still, however, be factors weighing on the credit ratings of Asian telcos. In addition to funds needed for 3G licenses (albeit relatively small compared to Europe), many companies expect to increase capital expenditure to build out their networks and invest in new technology.

Asian telecom companies could issue as much as $6 billion in bonds over the next 18 months as they seek to finance this expansion, Carley says. Some of those bonds will be issued in local currencies, but there will likely also be a swing back to bonds issued in dollars, yen and euros for bigger, longer-term bonds.

"Companies looking for access to a larger investor base will tend to go for issues in G3 currencies," he says. "For large capital expenditures you tend to want longer maturity and larger issues than you can do in local currencies."

While there's an ample supply of European telecommunications bonds, the Asian market has been undersupplied. The new issues, expected mainly from the big telecom incumbents such as Singapore Telecommunications, Korea Telekom and Telekom Malaysia, will give investors a chance to build or diversify their portfolios in the region.

"Our view is that bonds currently in the market are quite cheap, which is not true in general of most corporate Asian bonds." says Carley. "When you look at spreads in Thailand, Malaysia, Hong Kong, you see that bonds are trading very tightly to their international peers; there's no Asian premium. Telecoms is an area where there's still some value left."

Among existing issuers, Merrill recommends Korea Telecom, Philippine Long Distance Telephone (PLDT) and the Thai telecom companies. Korea Telecom is the highest rated telecom issuer in Asia outside Japan and Merrill believes its bonds are attractive relative to other Korean issues. In the case of PLDT Carley says the bonds trade at recent historically wide spreads to even Latin American benchmarks. And Total Access Communications of Thailand has seen its financing risk reduced since Telenor invested in the company earlier this year.


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