Telstra $1.5 billion bond on cards if PCCW deal proceeds

Telstra has secured some $3 billion of new financing since the start of June and $1.5 billion more is planned if, as expected, it proceeds with a $3 billion investment in Pacific Century CyberWorks.

Telstra could be issuing a $1.5 billion bond as early as October if, as planned, it forms a strategic alliance with Pacific Century CyberWorks (PCCW). Under the terms set out in a memorandum of understanding (MoU) signed in April, the two companies intend to form internet protocol backbone and mobile phone joint ventures. Telstra would invest $3 billion รป $1.5 billion in the joint ventures and $1.5 billion in a convertible note to be issued by PCCW.

Telstra Treasurer Cliff Davis says the strategic alliance is conditional upon PCCW completing its acquisition of Cable & Wireless HKT, scheduled to take effect on 17 August, and the outcome of on-going talks between the two parties. "We are negotiating in depth and extensively with regard the details of the joint-ventures ... those negotiations are unlikely to be completed before end-September," he says. If a deal is signed in early September, the earliest Telstra would be looking to raise cash to pay for the convertible note is late October.

In the MoU that was signed, the PCCW convertible would pay 3% interest a year for the first four years and 5% a year for the following two years. This coupon is likely to be slightly different in the final agreement to reflect moves in US interest rates since the MoU was signed. Regardless, Telstra will not necessarily receive any income. "We may be paid in kind [shares] rather than cash," says Davis.

Getting a $1.5 billion bond away should not prove a problem for Telstra. Since the beginning of June, the company has issued E1 billion ($925 million) of five-year bonds and is in the process of securing a A$2 billion ($1.15 billion) syndicated loan facility, arranged by Barclays Capital, Chase Manhattan Corp and Westpac Banking Corp. Davis says the loan, which pays 32.5 basis points above the bid for the Bank Bills Swap (BBSW) rate, is already oversubscribed.

The euro-denominated bond and the syndicated loan were necessary to refinance short-term debt taken on during the last year and a half, says Davis. During 1999, Telstra stayed away from the Australian bond market at the request of its controlling shareholder, the Australian government. Its plans to arrange long-term financing facilities at the start of this year had to be put on hold pending the announcement of the PCCW deal and subsequent rating changes.

Since the MoU was signed, Moody's and Standard & Poor's both downgraded Telstra's credit rating by one notch to Aa3 and AA respectively.

Telstra has net debt of around A$9.5 billion, but this may rise to as high as A$13 billion to A$14 billion in the next one to two years if a deal is agreed with PCCW, says Davis.