Como se combate o populismo? "Com eleições", responde Fukuyama

[Keyser Soze]

Portugal Telecom Bonds Lead Decline in Europe on Takeover Bid

Aug. 14 (Bloomberg) -- Portugal Telecom SGPS SA bonds are falling more than any other corporate debt in Europe as the phone operator tries to repel a hostile takeover.

Portugal Telecom's 500 million euros of 4.375 percent notes due in 2017 have dropped about 15 percent this year, since Sonaecom SGPS SA made a 10.7 billion-euro ($13.6 billion) offer. Sonaecom, Portugal's second largest, would need to finance the purchase with notes that may make Portugal Telecom's 2.9 billion euros of debt securities riskier, according to Standard & Poor's.

The bonds are also falling because Portugal Telecom Chief Executive Officer Henrique Manuel Fusco Granadeiro plans to try and block the proposed acquisition by spinning off the company's cable television operator PT Multimedia, and offering shareholders 3.5 billion euros in cash.

``If the takeover is successful, the rating is likely to be cut to speculative grade,'' said Leandro de Torres Zabala, an analyst at S&P in New York. The company may not keep its credit rating even if the takeover fails, he said.

The difference between the yield on Portugal Telecom's debt and government bonds has widened to 223 basis points from 89 basis points at the beginning of the year, higher than any of the more than 1,000 fixed-rate securities in an index compiled by Merrill Lynch & Co. to track the performance of euro-denominated notes sold by European companies.

Telecom Takeovers

European phone companies have become targets for buyouts because their revenue is stable and their shares are falling. The Stoxx 600 Telecommunications Index has declined 6.5 percent this year.

Dutch phone company Royal KPN NV's 1 billion euros of 4 percent notes due in 2015 fell as much as 9 percent in the past year on speculation it will be purchased in a leveraged buyout. Bonds sold by TDC AS, the former Danish state-owned phone company, slid 13 percent last year after a takeover group proposed an acquisition.

LBO firms arrange purchases using some of their own money and borrowing the rest, making the company's existing debt more risky.

``The telecoms industry has put itself into the LBO spotlight,'' said Simon Ballard, head of research at fixed-income broker Arc Securities Ltd. in London. ``LBO risk is the result of weak equities and underperforming management. Those are some of the things private equity funds look at.''

Worst Since 1999

European telecom debt is down 0.85 percent so far this year, on pace for the worst performance since 1999, when the securities lost 3.6 percent, according to indexes compiled by Merrill. The yield premium, or spread, European telecommunication companies pay to borrow in euros over benchmark government notes has widened to 71 basis points from 67 basis points at the start of the year.

The average spread for investment-grade bonds in Europe increased less, rising to 54 basis points from 52, Merrill data show. A basis point is 0.01 percentage point.

Portugal Telecom's 4.375 percent bonds, rated Baa2 by Moody's Investors Service and BBB- by S&P, yield more than the average for the high-yield, high-risk debt in Europe ranked at BB by S&P. The average spread investors demand to buy BB rated securities in euros is 187 basis points, Merrill data show. Junk debt is rated below BBB- at S&P and Baa3 at Moody's.

`Hit the Bonds'

``When we announced our bid the bonds widened because it was clear that more debt would be put on the company,'' said Chris Lawrie, chief financial officer at Sonaecom in Hora, Portugal. ``Since then we have had a hike in interest rates and the recent announcement by Portugal Telecom makes that leverage more certain,'' he said. ``That combination has hit the bonds. Whatever happens, Portugal Telecom is going to leverage anyway.''

A spokesman for Portugal Telecom in Lisbon, who refused to be named, declined to comment.

Mondher Bettaieb-Loriot, a money manager at Swisscanto Asset Management in Zurich, says Portugal Telecom's notes are attractive since they have fallen and because Sonaecom may buy back debt after a successful acquisition.

``I'm taking a bit of an informed bet,'' said Bettaieb- Loriot, who started buying Portugal Telecom's 2012 notes in February for the $900 million fund he helps manage. ``There is a good likelihood Sonaecom will buy back the shorter-dated bonds.''

Sonaecom says it hasn't decided whether it will repurchase any debt. ``We don't have any specific plans to buy the bonds back,'' Sonaecom's Lawrie said. ``We haven't had time, and we don't think this is the right time to make a decision on that.''

Investors are becoming increasingly concerned about Portugal Telecom's credit quality, based on the market for credit-default swaps. The cost to protect 10 million euros of Portugal Telecom debt against default increased more than fourfold to 193,000 euros since February. Investors use credit-default swaps to bet on an increase or decrease in indebtedness. The cost rises as the company's debt load increases.

``Because the two companies will fight against each other, ultimately it's destroying value,'' said Philip Watkins, a credit analyst at Commerzbank AG in London, who published a research note on Aug. 4 entitled ``Has Portugal Telecom Shot Itself in the Foot?''

To contact the reporter on this story:
Sebastian Boyd in London at sboyd9@bloomberg.net

Last Updated: August 13, 2006 19:41 EDT