Eircom is crucial lesson as IMF plans State asset sales
IT now looks certain that around 200 investment funds will end up owning Eircom in return for big losses on their loans, something that must be a concern for policy makers here.
Investment funds and global banks have loaned €3.7bn to Eircom, piling into the business in 2006 and 2007.
At the time lenders were so keen to lend to Eircom that they cut the interest being charged to be allowed to join the debt syndicate.
Time has proved them wrong. The economic crisis combined with longer term changes in the nature of telecoms companies means Eircom has more debt that it can sustain -- the only way the business can return to viability is for nearly a quarter of the current €3.75bn to be wiped out.
The losses will fall on shareholders and lower-ranked lenders first. Shareholders and investors owed €600m through so called 'PIK' notes, a type of bond, will lose everything. More senior lenders owed €2.4bn will suffer smaller losses and be handed a probably worthless business in compensation. They have only themselves to blame.
For the rest of us, questions must be raised about a regulatory regime that is asked to regulate aspects of what Eircom does, but to ignore any consideration of the viability of its business model.
Various owners were allowed to load Eircom with debt as long as the company met technical standards overseen by Comreg, and so long as the markets were happy to keep lending.
That is despite the fact that it remains a vital and licensed infrastructure business.
Lenders readying themselves for control are making all the right noises about allowing the business to invest for growth, but they are refusing to finance growth plans themselves.
That's no surprise -- losses of more that €1bn are bound to discourage further investment. Investors first concern is to get as much of their money back as possible.
Until that happens, Eircom's main focus will be as a debt repayment vehicle, just when the country needs a firm focus on infrastructure investment.
Eircom is a mess, but a timely one. The EU and IMF are eying the sales of state assets like Bord Gais and the ESB to help repay bailout loans. The news at Eircom is a timely reminder that a successful privatisation is not about looking at how much money a sale raises, it's about considering how good a service the private sector can provide -- and how to make sure it delivers.