Eircom 'at serious risk' of breaching debt covenants
Published 01/09/2010 | 05:00
Eircom has conceded that there is a "significant risk" it might breach covenants on part of its nearly €3.2bn debt pile within 12 to 18 months unless it takes urgent action to address the problem.
This has raised the prospect that shareholders, including the Employee Share Ownership Trust (ESOT) and Singapore Technologies Telemedia (STT), could have to inject cash into the business if a default becomes imminent or actually occurs.
Fresh job cuts and staff pay cuts are also on the agenda as management pushes to secure a further €90m in wage cost savings over the next three years. The company has already axed 1,531 jobs since March last year. Group operating costs fell 11pc last year to €1.16bn.
The warning came yesterday as the former state-owned telecoms firm reported an 8.5pc slide in revenue for the 12 months to the end of June to just under €1.83bn, while earnings before interest, tax, depreciation and amortisation (EBITDA) declined 3.3pc to €669m.
For the fourth quarter, revenue fell 8.1pc to €440m while EBITDA declined 0.6pc to €172m.
Speaking to the Irish Independent, Eircom chief executive Paul Donovan (above) downplayed the risk of a covenant breach, saying that it wasn't inevitable.
"There is nothing to say that a breach is inevitable. We do have actions that we can take and we have a wide range of options open to us," he said.
Those options include a renegotiation of existing covenants with bondholders, or shoring up the company's balance sheet.
Shareholders, including majority owner STT and the workers' ESOT, could conceivably meet any earnings shortfall that otherwise left unplugged would leave the company in breach of covenants.
The covenants are based on a ratio of consolidated net debt to consolidated EBITDA. As earnings slide, the ratio widens beyond permitted levels.
"Holding EBITDA up and managing the margin is a really important thing for the company to do," added Mr Donovan. He said in terms of achieving an extra €90m in wage savings, that it was "almost certain" Eircom would need fewer people in the future.
"That's not in question. The question is how many people and in which location? It's a very complex equation," he said.
One senior debt analyst told the Irish Independent that while Eircom's results were "pretty decent", revenue at the group remained "light".
Eircom is being advised by JP Morgan and London firm Gleacher Shacklock on its options, but Mr Donovan said no decision was likely to be made on debt issues for some time.
In its fixed-line business, Eircom recorded an 8.5pc decline in revenue for the full year to €1.42bn, while its Meteor mobile arm suffered a 7.7pc fall to €458m. Adjusted EBITDA on the fixed side was unchanged at €571m while Meteor's EBITDA was 12.9pc lower at €108m.