Grant Ferguson, CFO of Total Access Communication (DTAC), Thailand's second biggest mobile phone company, talks debt with FinanceAsia.
Has DTAC any new borrowings planned for 2003?
Ferguson; We've nothing planned at the moment, but we are very conscious of borrowing opportunities, especially since the market is favourable for borrowers at the moment. Our borrowings are not driven by the need to raise funds for expansion but primarily as part of our ongoing liability management programme. We've done a lot in this regard in the past couple of years and will continue to take advantage of opportunities in the local markets. Conditions are extremely good for borrowers at the moment. There's a lot of liquidity in the domestic markets, interest rates have continued to fall and therefore the cost of issuing debt has improved, as there is more pressure on investors to put their money to work. Also, on the supply side the pipeline is not full, particularly in our sector.
Can you tell us about the most recent deals you did, which markets (loan or bond) you have tapped and how they are performing?
In September/October last year we did two domestic deals as part of our liability management programme, a Bt4 billion loan with a small syndicate of banks and a Bt5 billion bond deal. The bond issue was interesting as it was the first seven-year deal that didn't come with a guarantee from a third party or a parent company. I think that highlights the attractiveness of telecom bond issues and investor appetite for them, but it also shows the market is maturing and becoming more sophisticated by considering new products. It was not so long ago that the domestic bond market was mainly about five year plain vanilla deals, but it has developed rapidly in the last couple of years.
What cost of funding do you typically aim for? Is cost the main motivation when you consider which markets to tap?
The cost of funding is a constantly moving target. When we did our deals last year we thought that we'd got very good terms, which of course they were at the time, but rates have continued to slide since then and we could get even better terms now. At the start of 2002, the total cost of debt was around 7%, which had come down to below 6% by the end of last year and is a little more than 5% now. However, I wouldn't say we have a target funding cost - our liability management plans look at the cost, risk and the tenor of our total portfolio. It is a question of getting the balance right.
What are your current spread levels like? Are they fair relative to comparables?
Our 2006 domestic bond is the most liquid of DTAC bonds in the market and the spread on that has contracted from around 150bp at the start of 2003 to around 60bp today, which is the around the market level for similar telecom issues. As I said before, it is a borrower's market now and the lack of new credits has resulted in strong demand for existing credits and spreads contracting.
There has been significant recent spread contraction on your 8.375% US dollar bond. What is it trading at now?
Our Yankee bond has tightened a lot. It currently trades at around 109% on a spread of 410bp over US Treasuries. I think this is in line with what has happened to other comparable regional telcos, like in the Philippine for example. If you look at the Asian dollar bond market, there haven't been too many new issues and the deals that have been done have been well subscribed. The region is seen as doing well by foreign investors and that has resulted in the strong demand we have seen for outstanding credits.
What is the cost difference between the domestic and international markets at the moment? Are there any circumstances in which you would consider a return to the international market?
Investment banks have approached us about doing offshore deals, but as things stand, the cost difference is still very much in favour of the domestic market. The principal factor in favour of the international market is the availability of longer tenors. We have seen the domestic market extend to seven years, but there has been no apparent interest in 10-year deals from the corporate sector as yet. In terms of cost, the international market is certainly very favourable in the context of recent history, but still nowhere near what we can achieve in the domestic market. I haven't priced the exact difference today, but I would think that we could do a five-year domestic deal at about 3% at the moment. Our US dollar deal is trading at about 410bp, so a new five-year offshore deal would cost us between 5.5% and 6%. Obviously if we wanted to go out to 10-years it would be even more expensive and I do not think that the trade off of getting extra tenor offshore can be justified in the current market.
What is your credit rating and what is the likelihood of that changing?
The company is rated B1 by Standard & Poor's, BB by Moody's and A- by TRIS, the local agency. I'm obviously always hopeful that the agencies will upgrade the company given our performance, but I think they have been very watchful about the competition and regulatory situation in Thailand over the past few years. Competition in the market has generally played out in the way we expected, which will allow us to be more focused on revenue growth this year. The regulatory environment has been evolving slowly for many years, but in the last six months or so we have seen steps taken to bring about changes that, by and large, we see as being positive for DTAC and the industry. Things are moving in the right direction but we will have to wait and see what the response of the rating agencies will be.
What do you perceive to be your main credit strengths and weaknesses?
Firstly we are a well-established operator in a large market that has developed quickly over the past two years, but which is now maturing. We have managed to hold maintain our market position, build out our network and establish our brand. DTAC is now at the position where we generate more cash than we need to invest. In addition to that, Thailand's economy is doing very well at the moment, in both a global and regional context. It also seems as the country has long-term political stability, which has not always been the situation here. As for weaknesses, I have to admit that our current debt/equity ratio of 1.7 raises eyebrows among some people, but I am not overly concerned about it. This is a capital-intensive business and we have invested significant amounts in the past two years, so I don't believe the figure is excessive relative to what we have achieved. As the rate of investment slows and our business develops, we should see the figure come down as we retire debt. At the end of the first quarter, our debt to EBITDA ratio was 4.4 and we have interest coverage of 3.6.