Employee-owned stake in Eircom being valued at zero by investors
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The employee-owned stake in Eircom is effectively being valued at zero by investors who are trading so-called payment-in-kind debt notes (PIK) in the company at just 10pc of their face value.
One senior market source told the Irish Independent yesterday that investors were effectively betting that Eircom could be forced to engage in what is known as pre-pack administration -- where bondholders take a massive haircut on their investments.
Such a process was undertaken late last year in the UK for Greece's third-biggest mobile phone company, Wind Hellas. As a result bondholders lost about €1.5bn of their investment in the company.
Eircom's Employee Share Ownership Trust (ESOT) owns 50pc of Cayman Islands-based Emerald Communications, which controls the equity stake in Eircom. The remaining equity is owned by Singapore Technologies Telemedia (STT). The ESOT also owns more than €50m worth of shares in Vodafone. The ESOT's original 35pc stake in Eircom was valued at about €26m at the time of the takeover by STT.
Of Eircom's current €3.26bn net debt, about €594m relates to a single tranche of high-risk PIK notes that are due for repayment in 2017. The PIK figure will be considerably higher by then.
Massive debt
While STT could potentially offer those PIK holders 25 cent on the euro, for example, some might decline the offer even though many would probably be likely to accept the money. PIK notes essentially roll up interest until maturity, rather than the issuer having to pay interest in cash during their lifetime.
Eircom's massive debt pile has accumulated after five changes in ownership within a decade. Eircom's former majority owner -- Australia investment fund Babcock & Brown Capital, also piled additional debt on to the company.
Earlier this month, Communications Workers' Union general secretary Steve Fitzpatrick claimed that Eircom could collapse within six months due to difficulties in servicing its debt. The company lashed out at the accusations, saying no such scenario was imminent.
Eircom's chief financial officer Peter Cross told investors yesterday that the company had "comfortable" headroom on all its debt covenants and was not in danger of breaching any. He said debt repayments were being met as they fell due.
"We are not about to do any type of debt restructuring," he told investors. "Eircom held cash of €265m at the end of March. We have positive headroom on our covenants and we are servicing our debt fully and appropriately."
However, he declined to say whether Eircom was involved in discussions with any of its lenders relating to its debt.
The company is understood to be seeking advisers in relation to its debt.
"We are continuing to review the long-term financial strategy of the group," added Mr Cross. "I won't predict the outcome of that work at this stage, but I'm confident that it will allow us to build the very significant developments we've seen at Eircom in the past year."
- John Mulligan
Irish Independent
