S&P warns of huge 'haircuts' if Eircom defaults
Some debt holders in Eircom could receive as little as 10 cent in the euro if the telecoms company defaults on its €3.6bn of debts, according to an analysis by a leading ratings agency.
Standard & Poor's (S&P) has done a 'recovery analysis' on the debt held by the parent companies that own Eircom.
While senior secured debt is likely to have recovery rates of between 90 and 100pc in the event of a default, debt holders further down the credit list could be facing big haircuts.
The second-lien loan, known as loan D, is only likely to leave holders with a recovery of between 10pc and 30pc of their principal.
The holders of a €425m payment in kind (PIK) loan would be facing the most severe haircuts. "The recovery rating on this debt is six, indicating our expectation of negligible recovery (0pc to 10pc) in the event of a payment default,'' state the company's analysts.
Eircom strongly rejects any suggestion that it could default on its debt load. However, speculators in the market who hold bond insurance -- known as credit default swaps (CDS) -- take a different view and this has sent the value of CDS contracts soaring in recent months.
S&P gives Eircom a valuation of €3bn in a distressed environment. It says that while Eircom has leading market positions and a "satisfactory business risk profile'', a default from excessive leverage cannot be ruled out entirely.
While Eircom is not in default on any loans, the pressure is building because the company's revenues and earnings are falling, potentially triggering a breach of its loan covenants.
S&P says: "We think revenues will continue to fall in the coming quarters as difficult economic conditions are likely to continue. This will compound structural declines in fixed telephony revenues."
Offsetting this is Eircom's ambitious cost-reduction programme, which has been noted by the ratings agencies.
The pension deficit at the company has also been tackled in recent months, but this has had little impact on the debt ratios, the agency points out.
"Eircom's cash-generating ability is likely to remain constrained because of its high interest burden, a difficult operating and competitive environment, restructuring payments and significant capital expenditures,'' said the latest note.
While the company is facing a serious debt headache, the liquidity position of the company is strong, states the agency.
Eircom has €267m of unrestricted cash to call on in case of emergencies and another €123m in an undrawn credit facility. The debt problems facing the company are more long term, the agency accepts.
It points out that the undrawn facilities and cash cover "modest debt maturities'' of €44m in the next financial year and €88m in financial year 2012. Eircom's financial year ends in June each year.
The company seems unlikely to get any relief from the ratings agencies in the foreseeable future. S&P concludes: "At this stage, we deem the chances of a higher rating in the future to be remote, as this would likely require the removal of covenant pressure on a sustained basis."