PLDT to re-finance debt

Telco mandates Credit Suisse First Boston and Morgan Stanley for a $450 million bond issue.

Philippines Long Distance Telephone Co (PLDT) is hoping to return to the international bond markets in September to term out its debt profile while interest rates remain low. The move forms part of a liability management programme, which has resulted in a gradual reduction of overall debt over the past year.

Local experts say the structure of the deal has not yet been decided and could either be an exchange offering or a new long-term bond, with proceeds being used to re-pay short-term debt either way. Analysts estimate that about Ps62 billion ($1.2 billion) of the group's Ps140 billion ($2.64 billion) total debt falls due between the peak years 2005 and 2007, of which $784 million comes from six separate eurobonds.

Just over 95% is denominated in US dollars, although two-thirds of the company's revenues are dollar-linked and about 40% of its currency exposure hedged.

So far the company has paid down about $127 million in 2002 and $165 million of its $233 million target for 2003. In 2004, it says it hopes to pay-down a further $284 million, reducing debt to EBITDA from 5.1 times on an unconsolidated basis this time one year ago, to just under 4.5 times by the end of 2004.

Analysts believe the forecasts are achievable because the company has cut capex for its fixed line operations, reduced headcount and recently been able to ramp-up the dividend pay-out ratio from its cellular arm, Smart.

Continuing evidence of successful de-leveraging may also encourage Moody's to upgrade the company from its current Ba3 rating. In April, the agency changed the outlook from negative to stable, but still rates the group one notch lower than Standard & Poor's BB rating with stable outlook.

For PLDT, a bond now would also seem to make sense since the group has been able to close the trading gap with the sovereign. At the beginning of the year, for example, PLDT's benchmark April 2012 bond was being quoted around the 950bp mark over Treasuries, a 450bp spread differential to the Republic of the Philippines.

By April, the gap had narrowed to 250bp, with the 2012 bond quoted around the 750bp mark. It is presently trading at about 540bp over Treasuries, a 171bp premium to sovereign paper. At this level, the $250 million deal is yielding about 9.34% compared to 11.375% at launch.

Some analysts still believe the bond has upside. As Barclays said in a research report published late last week, "On a year-to-date basis, PLDT bonds have strongly outperformed the benchmarks, but we believe there is still some marginal upside for spreads to gap in further in view of the continued improvements in credit fundamentals as against the cautious macro outlook for the sovereign."

Last week the company reported an unexpected Ps700 million ($13 million) second quarter loss because of provisions for employee redundancies and a non cash provision for unprofitable subsidiaries. Core revenue growth continued to be strong, however, with Smart recording 161% year-on-year net profit growth.

PLDT last accessed the bond markets in April last year when it completed a cash tender offering for its 2003 and 2004 bonds. It achieved a 54.68% acceptance ratio and used proceeds from a concurrent $350 million bond deal to fund $180 million for the tender and $170 million to pay down debt.

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