Eircom banking on forgiveness following record 9.25pc bond climb
EIRCOM has a checkered past with six ownership changes in 15 years, two short-lived stock market forays and Ireland's biggest bankruptcy. Now the phone company is counting on investors forgiving and forgetting.
The former state-owned operator, which cost bondholders €1.8bn when it restructured in June 2012, said yesterday that it hired Rothschild, Goldman Sachs and Morgan Stanley as it considers a public stock offering after issuing some of Europe's best-performing high-yield notes. Its 9.25pc bonds climbed to a record 111.2 cents on the euro this month.
"The history of Eircom has been one of buyer's regret," said Brian Lucey, a finance professor at Trinity College Dublin.
"Markets are hot for IPOs and Eircom is an easy sell linked to the Irish recovery. Whether the company and the product is any good is a second order of importance."
The company's biggest shareholder is Blackstone, which owned about 25pc in September, according to bondholder filings. Alcentra, the money manager owned by Bank of New York Mellon, also has a stake along with Silver Point Capital and Anchorage Capital.
Eircom entered examinership in March 2012 with €4.1bn of gross debt, the country's economic collapse causing customers to lower spending. The company, which said this month it has about €2.35bn of debt, is cutting more than a third of staff as part of plans to save €100m annually.
"The first-lien lenders who became shareholders stand to make a healthy profit from the IPO," said Frederik Foged Dreyer-Neilsen, chief executive officer at LEF in Copenhagen, which lends to businesses.
"The examinership helped transfer wealth from one creditor group to another."
Eircom was upgraded one level by Moody's to B3 in February, six steps below investment grade. The Dublin-based company faces a competitive telecommunications market and needs to invest in order to build a broadband network that will cover 70 pc of Ireland by 2016.
"The board is exploring a number of options with a view to further strengthening the financial position of the group, one of which includes a possible listing on a public market," said Eircom's Chris Kelly.
The company extended the maturity of most of its €2bn of loans by two years to 2019 last month, while its €350m of seven-year notes handed investors 22.5pc in the past year, making them the seventh-best performing junk bonds in Europe, according to data compiled by Bloomberg. This year they've returned 7.2pc.
"This may be a quite unique situation," said Brian Kennedy, a money manager at Boston-based Loomis Sayles, which holds Eircom bonds among $210bn(€152bn) of assets. "Is it normal to see a company come out of bankruptcy and move up this quickly?"
Eircom hasn't decided on the timing of the offer or how much of the business to float, chief financial officer Richard Moat told Bloomberg earlier this month.
The company's earnings before interest, taxes, depreciation and amortisation fell 1pc in the six months through December to €233m, it said in a February report. Net debt last year was 4.5 times earnings.
Moody's cited improved operating conditions, investments in 4G and fibre networks along with cost cutting when the ratings firm issued its upgrade.
It warned that growing revenue may prove "elusive" and calculated a ratio of net debt to earnings of between six times and 6.5 times by June.
"The step that would transform the company would be if they do an IPO and use the proceeds to reduce debt," said Ivan Palacios, an analyst at Moody's in Madrid.
"The company is in a transition stage. We expect Ebitda will stabilise in the near term and rise in the medium term."