Friday 22 September 2017

Investors face €2.5bn loss if the Eircom units default

John Mulligan

John Mulligan

INSTITUTIONAL Eircom investors could lose as much as €2.5bn if the company's various operations were to default.

Ratings agency Moody's yesterday raised the probability of default on €350m unsecured notes issued by one of the telco's firms by one notch.

Moody's said that in a worst case scenario for investors they would lose almost €1.9bn invested in various notes, loans and facilities related to the telco.

It predicted that if a default occurred on €3.3bn of senior secured bank credit facilities held by ERC Ireland Holdings, that investors would lose 38pc, or €1.25bn of the funds.

The agency added that a default on €350m of unsecured floating rate notes issued by ERCIF, another Eircom company, would result in investors seeing 95pc, or €332m of that wiped out.

A default on a second-lien €350m loan issued by another entity, ERCIH, would result in a €301m loss for investors, Moody's forecast.

A default on €650m of so-called unsecured payment-in-kind notes would bring the tally to €2.5bn.

But a restructuring of the bulk of Eircom's almost €4bn debt pile, rather than any default, is the most likely outcome of reviews being undertaken by the company and its advisers.

A debt restructuring would result in investors recovering about 65pc of the funds owed to them on a group-wide basis, predicted Moody's. That is more than the standard 50pc recovery rate, it added.

The issue of an outright default would be more likely to arise only if Eircom's majority owner, STT, and the employee share ownership trust (ESOT) decided against investing any further funds in the company.

However, STT and the ESOT are understood to have indicated that between them they are prepared to stump up as much as €300m in fresh equity, part of which would form a so-called "equity cure" that would prevent Eircom from breaching financial covenants.

Fresh cost-cutting

However, both sides are waiting for proposals for fresh cost-cutting at Eircom to be agreed between management and unions before they commit money. Those proposals could be ready within two weeks.

Moody's reiterated again yesterday that it thinks Eircom will breach its covenant on €3.3bn of senior secured bank facilities in the quarter ending this coming June, "if not sooner", as a result of economic challenges that are crimping revenues and earnings.

Downgrading ERCIF's probability of default rating, the lead analyst for Eircom at Moody's, Ivan Palacios, said the rating action reflected Moody's expectation of an increased risk of default by Eircom through some sort of debt restructuring.

He also confirmed a Caa1 corporate family rating for ERC Ireland Finance, an indirect parent company of the telco.

Irish Independent

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