Good God, don't any of these things just die?! Needless to say, if Marconi comes out with no debt (and related debt service costs), this will spell trouble for nortel and lucent equity holders, IMHO.
Rob
03/27 05:47
Marconi May Cede Control to Bondholders to Survive
(Update2)
By Dex McLuskey
London, March 27 (Bloomberg) -- Marconi Plc will probably try to persuade bondholders to swap the 1.8 billion pounds ($2.6 billion) they're owed for a controlling stake as the unprofitable U.K. phone-equipment maker struggles to survive, investors said.
On Friday, Marconi said it failed to gain bankers' approval for a new credit line. Its 432 million euros ($378 million) of 5.625 percent bonds due 2005 are trading at about 35.5 percent of face value, indicating bondholders don't expect to be repaid in full.
Investors who are buying the bonds today are betting they'll wind up in control of the company's assets. Marconi exited the defense business three years ago and spent more than $8 billion to focus on supplying communications gear, just as demand for such products slumped. The spree pushed debt as high as 4 billion pounds.
``For Marconi, the best-case scenario is a debt-for-equity swap,'' said Louis Gargour, a hedge-fund manager at RAB Capital, which owns Marconi bonds. ``The worst case for the company is bankruptcy with the bondholders paid in cash.''
Moody's Investors Service yesterday cut its rating on Marconi's bonds five notches to ``Ca'' on concern the company doesn't have enough cash to fund operations.
Its shares, which in 2000 had a market value as high as 34 billion pounds, today fell as much as 8.8 percent to 6.7 pence, valuing the company at 186.3 million pounds.
`Sooner the Better'
The company will have to begin talks with bondholders within weeks, investors said. Marconi bondholders have appointed law firm Bingham Dana LLP to conduct talks with the company. Joe Kelly, a Marconi spokesman, wouldn't comment.
``The sooner Marconi recognizes that a restructuring is required, the better,'' said Anthony Robertson, who helps run more than 150 million euros ($131 million) of high-yield bonds at New Flag Asset Management. He doesn't own Marconi debt. ``Pretty much all the bonds will have to be changed to equity.''
Marconi owes 92 million euros in bond interest on Saturday. About 28.2 million euros is due on its 5.625 percent bond maturing in 2005, and 63.8 million must be paid on the 6.375 percent bond maturing in 2010. The company said Sunday it will pay the interest.
Bank Talks
Chief Executive Officer Mike Parton has sold or agreed to sell about 1.52 billion pounds of assets to help cut debt, which stood at 3.5 billion pounds at the end of last year. The 116-year-old company, formerly called General Electric Co. Plc, is also cutting 13,000 jobs to slash its workforce by a third.
The London-based company's interest expenses more than doubled to 122 million pounds in the six months to Sept. 30, from 47 million pounds in the same period in the prior year. It paid 153 million pounds in interest in fiscal 2001, which contributed to a 271 million-pound full-year loss.
To keep alive negotiations with banks including Barclays Plc, HSBC Holdings Plc and more than 20 other lenders, Marconi agreed Friday to cancel a 3 billion-euro credit line.
It also agreed to cancel the 930 million euros of unused credit from a 4.5 billion euro loan gained in 1998, also arranged by Barclays and HSBC. The 3.57 billion euros it already drew must be repaid by March 2003, however the banks can now call in the loan at any time.
Conserving Cash
Marconi's bank and bond creditors have equal claim on its assets. A restructure would put banks higher in the creditor chain, investors said.
``Getting rid of the bonds would be beneficial to the banks,'' said Alix Stewart, who helps manage about 6 billion pounds of corporate bonds for Standard Life Investments. She doesn't hold Marconi bonds. ``A restructure would give the banks first call on the assets.''
Converting the bonds to equity would also help Marconi preserve its 1 billion pounds cash pile, investors said.
``The money would stay on the balance sheet for general corporate purposes, and a restructure frees up more cash as the bond interest goes,'' New Flag's Robertson said.
Swapping their debt for equity may be a better option than forcing Marconi to sell or close the business, investors said.
``The question is, how much would they get for a fire sale of telecom assets?'' said Stewart. ``It's not the bondholders' best option.''
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