Europe: Banks warned to monitor telecom debt--Billions on the line (two stories from the Electronic Telegraph) Having borrowed $343bn, has the telecoms sector overstretched itself? Mary Fagan and Grant Ringshaw look at why regulators are worried

Banks warned to monitor telecoms debt

NOT so very long ago everyone wanted to be part of the booming world of telecommunications. Shares in telecoms companies carried sky-high valuations and banks across the globe were all too eager to lend money to a sector with a seemingly insatiable appetite for funds.

Prospects for the telecoms sector seemed so rosy that banks became eager to lend large amounts not just to the blue chip companies with established businesses but to those with few assets, huge investment programmes and only the promise of earnings in the years to come.

All that is changing. Debt levels in the telecoms sector have soared to stomach-churning levels - global syndicated loans to telecoms companies this year so far exceed $343bn - and credit rating agencies have rushed to downgrade even the likes of the once-unassailable BT. A further $87bn worth of bonds have been issued, according to research by Thomson Financial, including $9.5bn by Vodafone and $8.4bn by BT.

Investor confidence in the potential returns from huge spending programmes in the industry has been on the slide and with it the value of telecoms shares. The billions being poured into the development of services such as third generation mobile and high-speed internet access would have beggared belief a year ago.

Now the spotlight has turned on the lending community. There are fears that providers of credit - whether syndicated loans or corporate bonds - have become too exposed to potentially risky telecoms debt. Regulators around the world are becoming concerned that the enormous sums lent to telecoms companies in past year could threaten the security of the entire financial system.

Both the Bank of England and the Financial Services Authority are examining the extent of the problem. In a speech to international bankers on Friday night Howard Davies, chairman of the FSA, spelt out his serious concerns about the level of banks' exposure to the telecoms sector.

Davies says: "What we are talking about here is a shot across the bows. We have advised banks to think long and hard about the profile of their exposures, and particularly to look at concentrations of risk in specific sectors, notably telecommunications. We are not saying that there are problems out there, but as part of our ongoing supervision of firms, we need to keep on top of the potential risk areas to ensure that firms' risk management systems are being effective."

The FSA is keen to emphasise that it is too early to draw conclusions, but it admits it will be making a series of statements on telecom debt in the coming weeks.

The Bank of England raised the issue in its latest Financial Stability Review, published in June. The Bank, it is thought, was aware of the problem as early as April from its consultations with risk managers of commercial and investment banks on both sides of the Atlantic.

According to the review: "The risk is that, against a background of profound change in the underlying fundamentals of the industry and a rapidly changing competitive environment, it might be difficult for lenders to assess, and price correctly, the longer-term exposures they are incurring."

Even for investment grade companies, the Bank notes, the price of credit has risen on fears over the multi-billion price tags for licences to operate third generation mobile networks. In the UK and Germany alone, the licence auctions have already cost telecoms companies #55bn. For sub-investment grade companies there is the real danger that as the appetite for flotations recedes and credit dries up, they will be hard pressed to find other sources to meet their cash needs.

Like the FSA, the Bank is closely tracking developments with increasing concern. Their interest has not been lost on those who have bankrolled the telecoms sector's spending splurge. There is anecdotal evidence that banks are hurriedly capping their exposure to the telecoms sector. Worryingly for the traditional investment banks, there are also reports that the commercial banks are threatening not to lend unless they are taken on for more lucrative advisory roles.

According to one City insider: "There are situations where the commercial banks are agreeing to lend money as a bridge to mergers and acquisitions or flotations but only if they get a share of the high-value-added action at the end. Investment banks have responded by getting into the lending business so you get a convergence of the business model. But of course if the music stops or gets jerked before you get to the value-added or have handed it around the street you just end up with a large bog-standard debt."

There is clear evidence in the US of sharp drops in telecom bond values, albeit so far in relatively small companies. Bonds issued by ICG Communications, a Morgan Stanley client, were recently trading at just 15 cents in the dollar while those in Viatel, also a Morgan Stanley client, were trading at 50 cents.

Large telecoms groups are still raising huge amounts of debt. But they are in danger of crowding out smaller companies who face the threat of being starved of funding and going to the wall. Among the first victims is Iaxis, a UK network provider, which folded earlier this year after funds dried up.

"Those companies which have not been able to raise capital face the prospect of a very cold winter without access to the money they need to develop," says Julian Hirst, managing director of telecoms, media and technology at UBS Warburg, the investment bank.

Senior bankers argue that bond issues are still surpassing anything seen last year. Thomson Financial's data also shows that in Europe, syndicated loans this year have reached $238bn compared with $117bn last year and just $24bn in 1998. Thomson points out that because some of the debt raised is used to pay off earlier debt, it is difficult to pinpoint the actual exposure. But the figures are astonishing nonetheless.

So what has happened to make lenders think again?

One top merchant banker points out that for the last 12 to 18 months the market has been living on promises that projected revenue growth will one day translate into profit and wide margins. "Everyone wanted to position themselves strategically on the grounds that the winner takes all," he said.

"But the market is saying now that we want some sort of proof that companies are gaining customers and that they can deliver on the business plan. Sentiment is saying that you have to question whether you will get the profits and whether, given the amount of competition that is coming in, will you see the margins?"

But he added: "This is more sensible. Six months ago it was madness: you sat down at home and did a business plan and then you got $200m of financing - that is not normal. The market has not shut down - there are still huge amounts of investment in telecoms. But there is much more scrutinising with people asking what are the most attractive business plans and which are the better managements."

Another City insider noted: "It is certainly more difficult to issue high yield paper now than even a few months ago - and across all investment rating grades. But it is not yet zero. One issue is how far credit is linked to expectations. If those expectations look like being unfulfilled then people could end up refinancing in a very different environment."

One issue on which everyone agrees is that the prices for third generation mobile licences have exacerbated the situation. BT's debt will hit #30bn this year compared with #8.7bn at the end of 1999, mainly because of the #4bn it paid for a 3G licence in the UK and a series of acquisitions. Its decision in August to increase its stake in Germany's Viag, which the same day won a German 3G licence, prompted Standard & Poor's, the rating agency, to cut the group's credit rating from from AA Plus to single A. Moodys later also downgraded.

BT is not alone. Deutsche Telekom, KPN and France Telecom have all been downgraded.

Paul Cuatrecasas, managing director of investment banking boutique ARC, says that no one is immune. "The real question is how deep is the pain going to be and who will suffer the most. The amazing thing is that some relatively blue chip companies are almost being treated like they have junk for debt."

http://www.telegraph.co.uk/et?ac=000122257519214&rtmo=r2kbEbDX&atmo=rrrrrrfs&pg=/et/00/10/22/cctel22.html

FINANCIAL regulators are telling the world's largest banks to monitor their lending to telecoms companies amid fears that a massive surge of borrowing from the industry in the past nine months could lead to a credit crunch. An investigation by The Telegraph has revealed that telecoms companies around the world have borrowed $431 billion (#299 billion) so far this year. The figures include $343 billion (#238 billion) raised in syndicated loans and bond issues worth $88 billion (#61 billion). The cash has been used to fund a frenzy of investment in the development of sophisticated new telecoms service as well as multi-billion dollar mergers and acquisitions.

The Financial Services Authority, the chief City regulator, and the Bank of England, have been concerned over the potential risk of telecoms debt since April or May. But evidence that fears are growing came on Friday night when Howard Davies, the chairman of the FSA, raised the issue in a key speech to the Institut Internationale d'Etude Bancaires, one of the leading French banking bodies.

Mr Davies said: "What we are talking about here is a shot across the bows. We have advised banks to think long and hard about the profile of their exposures, and particularly to look at concentrations of risk in specific sectors, notably telecommunications."

He said: "We need to keep on top of the potential risk areas to ensure that firms' risk management systems are being effective." There are now concerns in the telecoms industry that as debt levels rise and lenders become too exposed to telecoms and technology stocks, that smaller and less established companies will be unable to raise the finance they need to survive.

According to figures compiled by Thomson Financial, BT is top of the league for European syndicated loans, with an estimated $52 billion (#36 billion) borrowed in the year so far. BT has also raised $8.4 billion (#5.8 billion) worth of bonds to help finance takeovers and the acquisition of third generation mobile telephone licences. In addition to BT the major borrowers include Vodafone and France Telecom.

http://www.telegraph.co.uk/et?ac=000122257519214&rtmo=qXRLMqR9&atmo=YYYYYYbp&pg=/et/00/10/22/cnban22.html

-- Carl Jenkins (Somewherepress@aol.com), October 21, 2000

Answers

The makings of a first-rate, world-wide credit crunch are past the incubation stage.

-- Billiver (billiver@aol.com), October 22, 2000.

Carl,

Thanks for these extremely important posts! In fact, they fit in quite well with another article I just read - about Cisco's future viability/stability - one concern for Cisco was the telecom industry continuing to spend big $$$ for their goods.

I hope they reconsider their construction plans - the future looks rather shaky, at least for a while...

Link to article:

http://www0.mercurycenter.com/front/docs1/013828.htm

-- Deb Mc (vmcclell@columbus.rr.com), October 22, 2000.