Network of Wonder
By Sean Kennedy, AsiaWise
28 Mar 2001 12:30 (GMT +08:00)
Last year was a bumper one for loans in Hong Kong, and an upstart New Economy company single-handedly helped skew the figures for 2000 as a whole.
Pacific Century CyberWorks (PCCW) made history with its $12 billion (HK$93.6 billion) loan to fund its acquisition of Cable & Wireless HKT (C&W HKT). It was described as the largest acquisition in Asian history and, appropriately for an Internet company, it was syndicated online.
But while bankers mobbed PCCW, or rather the company it was buying, C&W HKT, itself a rare visitor to the loan market, the ardor of lenders for PCCW has cooled -- bad news for a company that has a lot of expansion ahead of it.
Sebastian Tong, a correspondent with Loan Pricing Corporation, a Reuters unit, said the company's last deal, a US$4.7 billion refinancing was tough going because pricing was seen as "insufficient".
While the company has its financing needs covered for now, it's only a matter of time before it will want more -- operating as it does in a market where things like third-generation (3G) mobile systems are pushing infrastructure investment into the stratosphere.
The refinancing deal was also pushed at a time when telecoms around the world were running up huge 3G borrowings, and also unnerved some banks worried about the debt level the company was piling up, Tong said.
Despite the company's assets and money, Nomura International analyst Richard Ferguson said concerns remain. While recent rights and bond issues -- and the successful conclusion of its refinancing package -- might satisfy concerns over short-term liquidity, "PCCW's free cash flows are unlikely to be sufficient to cover debt repayments," says Ferguson.
Tai Fook Securities senior investment analyst Shea Kai-ming said its debt level could cause longer-term headaches. Picking up on that point, KGI Asia's Samuel Chua said the company's debt will hobble any mainland expansion by PCCW after China enters the World Trade Organization (WTO) -- not a great position to be in, Chua thinks, when it has to face deep-pocketed European and U.S. competitors.
In a compendious report on the company, Nomura's Ferguson said it won't be easy for PCCW to raise cash through either debt or equity in the current market -- since many other operators are out in the market seeking funds.
The options aren't pretty either -- if PCCW chooses to postpone expansion, Ferguson told me, that would "imply that the value of PCCW is the value of its existing businesses."
SG Securities analyst Jonathan Iu said telecoms worldwide owe boatloads of money but have no alternative except to borrow more. And with investing in broadband the only way forward, telecoms have to fund expansion or quit.
While PCCW might be in for a period of slow growth, its fixed-line business is a cash cow, which should allow it to easily cover its debt servicing, Tai Fook's Shea said.
And there are shreds of silver lining in the banks of black cloud hanging over PCCW. WorldSec International says its recent move to cut costs in its Network of the World operation would save it at least HK$300 million annually. Coupled with falling interest rates, PCCW's interest cover and long-term debt repayment abilities had improved substantially.
Assuming that the benchmark London Interbank Offered Rate (LIBOR) eases to a yearly average of 5%, PCCW's interest cover, according to Worldsec, would rise to a healthy 3.3 times -- in other words, cashflow covers the interest bill more than three times over.
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