Some Eircom bonds trading at 15 cent in euro
SOME Eircom debt is changing hands at between 15 and 18 cents in the euro as investors reckon the company cannot repay all of its €3.2bn of debt.
The massive discount on the most junior PIK (payment in kind) bonds reflects the view in the bond market that some Eircom debt will never be fully repaid.
Even relatively senior Eircom bonds are trading at a discount of more than 40pc of face value. It's the latest sign that investors reckon the heavily indebted telecom will have to find a way to cancel some of its massive debt mountain.
PIK notes are bonds that pay interest in the form of new debt rather than cash. Some money managers prefer PIK paper because it allows them to have more money invested for longer, but if things go wrong investors can be left with nothing.
Companies on the other hand love not having to make regular cash payments, even though their total liabilities end up continually rising.
While trading in the Eircom PIK paper has priced in some kind of default, the price was actually up from around 12 to 15 cents in the euro last week, before the company announced results to the end of June.
Despite being low, the prices suggest bondholders don't anticipate a complete write-off of the paper -- which more senior lenders would love to see.
Sources in the bond market say the bonds were up on positive noises from Eircom rather than hard news.
The likelihood of a debt restructuring as early as this December has long been priced into the debt, so last week's announcement that Eircom was unlikely to breach covenants on the most senior part of its debt in the next 12 to 18 months was seen as positive news.
Companies typically breach covenants, the conditions attached to bank debt, when the ratio of turnover to debt rises above an agreed maximum. Though strictly speaking a technicality, breaching loan covenants does put companies into default and at risk of being taken over by creditors.
The latest bond price rise comes because the company said its preferred restructuring options included renegotiating the debt covenants to pre-emptively avoid a technical default or raising new cash from its shareholders.
PIK holders hope some of that new cash might be used to pay junior debt to walk away under a negotiated settlement.
The likely alternative would be for the company to renege on its junior debt and try to squeeze it out through a court- approved scheme of arrangement.
Any legal fix will have to take into account the fact that Eircom's debt is issued by a holding company in the Cayman Islands, and subject to Cayman law. Majority shareholder STT paid just €30m in real terms last January to buy Eircom and has the cash to reinvest in the business.
despite everything, it already looks like a good deal for the Singapore state-owned company. By the end of this year, STT will have recouped a good chunk of its investment by collecting its share of a €9.7m per year "management fee" for running the business.
Now creditors are hoping that having bought in cheap, STT is incentivised to stay the course.
Meanwhile, at the operational level, Eircom's restructuring is already under way, and the company has appointed Marie Lee as group HR director, reporting to CEO Paul Donovan. She has been with the group since 2003, most recently as interim director of group HR.