Telstra flags Ç1 billion eurobond

The national telco will tap the euro market with a long-term benchmark issue lead by JPMorgan, BNP Paribas, Deutsche Bank and Barclays Capital.
Telstra has announced plans to tap the eurobond market with a long-term issue of up to Ç1 billion. The four joint leads who managed the telcoÆs last foray into euro market in 2005 û JPMorgan, BNP Paribas, Deutsche Bank and Barclays Capital û are also managing this transaction.

The deal has been timed to take advantage of strong investor sentiment towards Telstra following its full privatisation in November last year and the release of half yearly results in mid-February which, the company says, show that its transformation plan is on target.

TelstraÆs chief financial officer, John Stanhope, says the lead managers are now testing the market to determine the size and tenor of the eurobond and that after the bond is completed, ôthe company will remain within or below its capital management parametersö. Stanhope says: ôThe proceeds of the borrowing will be used for general corporate funding requirements, with a significant portion directed to the refinancing of short-term debt.ö

None of the leads would comment on the transaction yesterday.

In a briefing prepared for fixed-income investors, the company says it is borrowing to lengthen its maturity profile. Telstra had A$13.1 billion in net debt outstanding as at June 30, 2006, with about A$2.5 billion of this maturing in 2010 and another A$2 billion maturing in 2014. Its current long-term debt average maturity is 4.3 years which is right in the middle of its three- to six-year target band.

Telstra has estimated that its funding requirements for the 06/07 financial year are around A$2.5 billion, with A$400 million of this required to refinance maturing long-term debt and A$2.1 billion needed for internal cash flow. The requirement will be funded using three sources: private placements (of around A$600 million which have already been completed); increased short-term borrowings (A$300 million); and proposed long-term borrowings (A$1.6 billion).

The company runs a net-interest-cover ratio of 10.3 times, a net debt ratio of 50.4% and a debt coverage ratio (Ebitda-to-net-debt) of 1.4%.

The leads will be hoping that Telstra can maintain its long-term credit ratings during the execution of the eurobond. Telstra is a mid-range telco credit with an A by Standard & PoorÆs, A2 by MoodyÆs and A-plus by Fitch which puts it in the same basket as other global telcos like AT&T, BellSouth Corp and TCNZ. But all three ratings agencies have a negative outlook on Telstra reflecting the regulatory and transformation risks that it faces.

Telstra has already slipped a notch on the MoodyÆs and S&PÆs ratings scales since it last issued in the euro market. In June 2005, when it placed a dual-tranche Ç1 billion offering, the agencies rated it A1 and A+ respectively.
That deal priced at mid-swaps plus 37bp for the five-year Ç500 million tranche and mid-swaps plus 57bp for the 10-year Ç500 million tranche, paying a coupon of 3% and 3.875% respectively. The 10-year bonds have since traded significantly wider, touching mid-swaps plus 70bp.

At the time of the deal, arrangers said the bonds were well oversubscribed with Ç4 billion in interest generated from 250 orders. Eventually 122 investors took part in the five-year tranche and 140 investors in the 10-year tranche, with 60% of the deal placed with accounts in the UK, France and Germany. Asian fixed-income accounts also participated in the sale.

The joint leads on this latest eurobond will be hoping that fixed-income investors make the same assumptions about Telstra's future that equity investors made when buying T3 shares in November. Telstra's management has been pursuing a transformation strategy for the last two years but has been dogged by industry turbulence and adverse regulatory interference.

Financial results for the company have been flat for the last five years despite a huge surge in revenues and profits for the rest of corporate Australia. For the year ended June 30, 2006, Telstra made revenues of A$23.1 billion ($17.3 billion) compared to A$22.5 billion in the 2005 financial year. And recorded an Ebitda of A$9.6 billion in 2006 versus A$10.5 billion in 2005.

The company says it is targeting revenue and Ebitda growth of between 2% and 2.5% for the next three years.

"We feel confident that the debt markets are strong and that investors will provide solid support for the new issue," says CFO Stanhope, justifying the company's decision to launch the bond.
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