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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (6174)	5/24/2002 2:31:00 AM
From: John Pitera	Respond to of 33421

GE Capital ups Credit Line-- Deutsche Telekom Is Dealt Blow After Moody's Issues Downgrade By RICHARD A. BRAVO DOW JONES NEWSWIRES NEW YORK -- Just hours before Deutsche Telekom AG was expected to price its five billion euro ($4.61 billion) equivalent global-bond deal, which included a $500 million 30-year portion, the company encountered a costly bump in the road. Moody's Investors Service *changed its outlook on the European telecom company to negative* from stable*, driving secondary spreads* on the company's debt to wider margins and throwing the new transaction into disarray. Meanwhile, General Electric Capital Corp. unit took another step to improve its liquidity position. The financing arm of General Electric Co. closed an $18 billion syndicated credit facility through joint bookrunners J.P. Morgan Chase & Co., Salomon Smith Barney and Banc of America Securities LLC. Due to strong demand, the issue was increased from an initial size of $15 billion, with 29 global investment and commercial banks participating in the facilities. The new credit facilities are in addition to the $33 billion in commitments listed in GE's annual report as backstop lines. GE Capital came under fire from <b.bond guru Bill Gross of Pacific Investment Management Co. earlier this year due to GE's heavy reliance on commercial paper not fully backed by bank lines. The resulting negative publicity prompted the blue-chip company to publicly vow to maintain its triple-A ratings. "I don't think anyone believed GE would have trouble lining up additional bank lines, but the fact that the size of the facility was increased due to strong demand is a sign debt investors still feel comfortable with GE's credit quality, despite the recent discussions about issues such as its reliance on short-term debt and its financial disclosures," said Kathleen Shanley, senior credit analyst at Gimme Credit Finance, an independent research firm. The Moody's shift on Deutsche Telekom came after a dismal earnings report from the company on Wednesday. It posted a wider-than-expected first-quarter loss of €1.8 billion, compared with a loss of €358 million a year earlier. The offering is expected to price Friday, which has upset many investors who were hoping to get an early jump on the Memorial Day weekend. Moody's, in a report, said the revised outlook was due to a "concern that trends may well be emerging within the industry, such as declining growth rates in fixed line traffic or even an absolute fall in traffic volumes, at a faster pace than previously considered probable." Moody's gives the company a Baa1 long-term rating. Thursday, yield margins on Deutsche Telekom's 8.25% bonds due 2030 gapped out around 0.30 percentage point to trade at 3.60 percentage points over Treasurys. That was outside the price guidance on the new bonds, where levels were set at 3.40 percentage points to 3.45 percentage points. The underwriters had to reconfirm orders with investors, many of whom said, according to sources involved in the deal, that they would back out of the transaction if the yield margins weren't pushed out accordingly. Later Thursday, price guidance for the U.S. tranche was set at 3.60 percentage points. The additional yield will cost the company around $14 million in additional interest payments. The timing of the deal seemed a curiosity to many market pros. The telecom sector has been a source of consternation and horrendous returns for the past few months and has seen WorldCom Inc. and then Qwest Communications International Inc. downgraded to junk status. "We're unable to get comfortable with Deutsche Telekom because the sector in general is a real tough one," said Andy Harding, director of taxable fixed income at National City Investment Co. "Every time you feel it's okay to go in, you have another [negative] headline." Investors had earlier flocked to the deal, with underwriters saying on Wednesday that the U.S. portion was seven times oversubscribed. While Deutsche Telekom's revised price guidance doesn't offer much of a concession to its debt outstanding, interested investors still like the risk premium priced into the securities. Moody's average Baa Industrial Company Bond Yield as of last week had a yield margin of 2.17 percentage points over Treasurys. Furthermore, the deal will include a coupon step-up of 0.5 percentage point if Deutsche Telekom's ratings are cut one notch by both Moody's and Standard & Poor's. The coupon will step back down if the ratings subsequently rise. But some aren't convinced. "When these things go, 50 basis points [0.50 percentage point] is negligible," said Mr. Harding. "Would a 50 basis point step-up have helped Qwest?" he asked. Qwest lost its investment-grade rating from S&P on Wednesday, as it was cut to double-B-plus from triple-B-minus. It still clings to Moody's lowest investment-grade rating of Baa3, but is on watch for a downgrade. Deutsche Bank Securities Inc., J.P. Morgan Chase and Schroder Salomon Smith Barney Inc. are co-leads on Deutsche Telekom's deal. Standard & Poor's rates the company's debt triple-B-plus and Fitch Ratings rates it single-A-minus. online.wsj.com