Sunday tests investors' faith

Hong Kong mobile phone operator Sunday Communications has mandated Credit Suisse First Boston and JP Morgan for a first high- yield bond offering.

Hong Kong mobile phone operator Sunday Communications is hoping to raise $300 million this autumn, in what should prove an interesting test of investors' willingness to absorb paper from a company that is not projected to turn EBITDA positive until the first quarter of 2002.

High-yield bond offerings from telecommunications companies in the build-out stage of their development have already proved very popular in Europe and accounted for 50% of all issuance during 1999. Typically cut off from the bank market because the sector typically returns negative operating cashflow and start-up losses in the early years, such issues have, by contrast, been lapped up by fixed income investors focused on longer-term potential.

Investors, however, need to be convinced that companies will eventually break even and where Sunday is concerned, there is little consensus about what the company will look like a couple of years down the road. "It's very difficult to attach a valuation to the company because there are a whole number of different scenarios that could play out in very different ways," says Peter Milliken, telecom analyst at Lehman Brothers.

"Firstly, there could be consolidation in the industry which leads to a merger, or alternatively the company might bring in an outside shareholder," he adds. "Secondly, the company might acquire a 3G licence when the government awards them in what is looking like the first quarter of 2001, or it might not. Our valuation range on the company's shares, therefore, spans a very wide range of HK$0.30 to HK$2.50." 

Lessons to learn

The contrasting experiences of Asia's two outstanding high yield telecom bond also offer a salutary lesson in the pitfalls and advantages inherent in the sector. Last summer, for example, the Philippines' Bayan Telecommunications (BayanTel) and Globe Telecom both launched high-yield offerings within a few weeks of each other.

The former, led by Bear Stearns and Lehman Brothers, comprised a $200 million seven-year issue, with an issue price of par and coupon of 13.5% to yield 15% or 939bp over Treasuries. Rated B-/B3, the deal struggled to drum up interest in the US and was only finally priced after securing one anchor order that amounted to half the issue amount.

Now rated CCC/Caa2, the bond is quoted at 50 cents on the dollar and is trading at 2,715bp over Treasuries, or a yield of about 33%. Its poor performance and ratings downgrades have been attributed to a highly competitive local environment, which has seen BayanTel squeezed by mergers between PLDT and Smart and also Globe and Islacom. Having failed to meet growth forecasts, the company's EBITDA dropped 7% during 1999 and interest coverage consequently plummeted to only 0.7%.

By contrast, Globe raised $220 million from a 10-year non-call for five transaction led by Salomon Smith Barney. Rated B+/B1, the deal was priced with a yield of 13% equating to a launch spread of 709bp over Treasuries. Since then, fuelled by stronger than expected subscriber growth and the company's takeover of rival Islacom, its bonds have proved to be among the region's better performers. Currently trading up at a bid/offer price of 105/106, the bonds are quoted at about 650bp over Treasuries, or a yield of 12.67%.

Most bankers agree that while Sunday is optimistically hoping to price itself at similar levels to Globe, it is likely to have to come at least 100bp wider unless warrants are incorporated in the offering as an additional sweetner. 

Others, however, say that the company has enough interesting core businesses to make it a sellable credit and that its Hong Kong location, combined with the company's management expertise should play in its favour. "Sunday should get a weak single-B rating," comments one banker, "and if this materializes it might give it enough tail wind to bring pricing down towards Globe's levels."

Steep decline

The company presently ranks as Hong Kong's fifth largest mobile player, listing in Hong Kong and New York in March. Having floated at HK$3.78 per share and US$14.72 per American depositary share, the company is currently being traded at HK$0.93 and US$3.375, giving it a local market capitalization of only HK$3 billion ($387 million). Further fundraising from the equity market is, therefore, not a viable option.

Analysts attribute the steep decline to collapsing valuations in the internet sector. "The company secured aggressive launch pricing by promoting itself as an internet company and now it's suffering from the fallout," says one.

To the 1999 financial year-end, the company, whose major shareholders include Distacom and the Lai Sun group, reported a net income loss of HK$923.9 million. Looking forward, it has a three-tier growth strategy encompassing 3G development, wireless internet and regional expansion.

In its home market, some analysts remain sceptical about growth prospects in a mature environment where mobile penetration already stands 54%. In its favour, however, analysts cite Sunday's high level of brand awareness and its reputation for innovation. Its network already employs WAP (wireless application protocol) technology, for example, connecting users to the internet via their phones.