Friday 24 March 2017

Price of Eircom debt plunges despite bond buy-back reports

Donal O'Donovan

Donal O'Donovan

THE price of Eircom debt suffered its latest plunge in secondary markets last week, despite reports that a negotiated deal to deleverage the company could be at hand.

Eircom's bonds fell nearly 30pc last week as investors worried that a deal to tackle the company's €4bn debt burden remained elusive. Many investors based in the UK and on the continent also fear Eircom will suffer if the economy here deteriorates further, sapping investor appetite.

The price of Eircom's €350m of senior bonds dropped from just under 40pc of face value to around 31 cent in the euro in just a week.

A newspaper report over the weekend said Eircom's owners could pump €300m into the business to fund buying back some bonds at a discount.

If Eircom's owners did buy back bonds at a discount, the money saved on debt repayments would boost their chance of eventually making a profit on the deal.

However, a buy-back would risk handing over cash to lenders without copperfastening that return.

Last night a London-based banker, who is focused on the deal, told the Irish Independent that buying back the bonds would not solve the key debt covenant that measures the ratio of senior debt to revenue.

He said it was hard to see why owners would invest fresh cash without the senior lenders agreeing to a more comprehensive deal, including resetting the debt covenants.

A spokesman for Eircom said that all options remained open.

Even at steep discounts, a buy-back would boost prices in the secondary market, but trading there shows no evidence the market is anticipating such a move.

Around €600m of the least-secure Eircom bonds, known as payment in kind (PIK) notes, are trading at between 3pc and 5pc of face value. They change hands only infrequently, traders said.

The PIK notes are the most vulnerable to being written off in a debt restructuring. People involved in the case described the prices being paid for the PIKs as "option value". It means the paper is cheap enough to take a punt on, even if it has little or no economic value.

Repaid

The biggest portion of Eircom's debt is €3bn of bank loans. These loans are the most secure part of the debt structure and are first in line to be repaid even in the event of a default.

Prices for those loans are less volatile as a result. Some deal is undoubtedly edging closer.

Eircom's owners, STT of Singapore, and an employee shareholder scheme known as the ESOT, risk losing control of the company if it fails to meet a test of the covenants, or conditions, on its bank loans. The covenants will be tested at the end of March, July and September.

STT is one of the biggest telecoms investors in the world and has more than enough cash to ensure that tests are complied with, if it has the appetite to reinvest in Eircom.

ESOT has around €150m available to invest alongside STT if it wants to retain its stake.

Irish Independent

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