Capex on the rise?: from Bloomberg "
The Federal Reserve's decision to cut the benchmark U.S. lending rate by half a percentage point
to 6 percent will help cut the costs of servicing this debt, he said. He estimated that further interest
rate cuts could slice interest costs for European phone companies by as much as 50 percent.
``The benefits on cash flows are enormous (from) a fall in interest rates,'' Joshi told Bloomberg
Television. Paying interest ``is a big part of their cash outflow at the moment.''
Another benefit is that rate cuts help spur economic growth and consumers' willingness to buy
phone services, Joshi said.
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01/14 04:41
Europe's Debt-Laden Phone, Cable Companies Rally on Rate
Relief
By Christine Harper
London, Jan. 14 (Bloomberg) -- Shares of European phone and cable companies, whose rising
debts led investors to shun them late last year, have returned to favor with investors after the
U.S. Federal Reserve's surprise interest rate cut Jan. 3 spurred hopes their financial prospects
will brighten.
The Bloomberg European Telecommunications Services Index has risen 8 percent since the rate
cut, making it the best performing group in the Bloomberg Europe 500 Index this year. Some of
the most indebted companies posted the biggest gains.
``Risks in the sector appear to be going down,'' said Patrick Nielsen, who oversees 1.5 billion
euros in stocks as head of international equity at Mapfre Inversion. ``People are reshuffling their
portfolios and turning to telcos.''
Shares of UPC NA, an unprofitable cable TV company with debt of about $6 billion, rose 39
percent last week. Deutsche Telekom AG, whose debt has swelled to half its market value, rose
6.7 percent to its highest in a month.
Last year, European phone companies spent more than $90 billion on licenses to offer fast
wireless Internet services and are expected to have to spend as much as $200 billion more on
technology to offer the services. Multi-billion dollar takeovers also added to the debts of
companies such as Deutsche Telekom AG, France Telecom SA and British Telecommunications
Plc.
Competition
At the same time, competition was forcing companies to cut prices, undermining profitability.
Slower economic growth raised questions about future spending on telecom services. And falling
share prices made it more difficult for companies to raise money to pay down debt.
Debt-to-equity ratios of Europe's phone companies rose to 73 percent at the end of September
from 50 percent at the start of last year, according to Dhaval Joshi, a global strategist at SG
Securities in London.
The Federal Reserve's decision to cut the benchmark U.S. lending rate by half a percentage point
to 6 percent will help cut the costs of servicing this debt, he said. He estimated that further interest
rate cuts could slice interest costs for European phone companies by as much as 50 percent.
``The benefits on cash flows are enormous (from) a fall in interest rates,'' Joshi told Bloomberg
Television. Paying interest ``is a big part of their cash outflow at the moment.''
Another benefit is that rate cuts help spur economic growth and consumers' willingness to buy
phone services, Joshi said.
Market Rally
``Spending on telecom services is sensitive to the economic cycle,'' he said. ``We would be
buying telecom operators at the moment and selling more defensive sectors like pharmaceuticals.''
Shares in European cable-television companies such as NTL Inc., the U.K.'s biggest, and United
Pan-Europe Communications NV, No. 2 in Europe, have also shot higher since Jan. 4.
NTL shares are up 63 percent and UPC shares are up 47 percent so far this year. Analysts said
that the companies, which are unprofitable and had net debt exceeding their market value at the
end of next year, are benefiting from better conditions for issuing bonds.
``The whole sector is rallying,'' said Leila Ghachem, an analyst at J.P. Morgan Chase & Co. ``The
guys who need the money most desperately are up the most.''
U.S. dollar-denominated bonds issued by European phone companies have performed well
since the rate cut. The spread on British Telecom's 7 5/8 bonds due in 2005 has narrowed to 208
basis points above government bonds from 237 points at the end of last year. Deutsche
Telekom's 7 3/4 bonds due in 2005 are trading at 206 basis points more than U.S. Treasuries,
down from 226 basis points last year.
Some companies are already taking advantage of the lower interest rates to borrow money.
British Telecommunications Plc, which last month sold $10 billion of debt, said Jan. 5 that it plans
to sell Eurobonds in several parts in the next few weeks to help refinance its borrowings. The
company said last year that it expected its debt to swell to 30 billion pounds ($45 billion) by
March.
KPNQwest NV, Europe's No. 2 provider of Internet access to businesses, plans to sell 500
million euros ($476 million) of high- yield bonds, people familiar with the matter said. |
