Eircom to miss €5.7m payment despite having the cash on hand
EIRCOM will not make an interest payment to lenders when it falls due next week.
Telecoms giant Eircom said last night that the company would not pay a €5.7m interest payment to bond holders when it falls due on February 15.
It is the first time that the company will default on an interest payment on any of its €3.6bn of debt, even though Eircom and its lenders have been involved in months of ineffectual, negotiations over how to tackle the company's well-known debt crisis.
Last night, a spokesman for Eircom said the company had not run out of money, and was financially well able to meet the interest payment.
He said the decision not to pay the €5.7m was taken on instructions from more senior lenders to Eircom, who now effectively control the telecoms company.
Suppliers, employees and other non-financial creditors of the company are not affected by the latest move.
"The payment suspension does not impact on the continued operation of the group's business.
"All Eircom and Meteor services and payments to suppliers continue as normal," the company said in a statement.
Eircom's €3.6bn borrowings are made up of a complicated, multi-layered debt structure.
The quarterly interest payment that is due to be paid on February 15 relates to a group of lenders that are owed €350m in the form of "floating rate notes" (FRN) -- a type of corporate bond where the interest rate due to bondholders tracks the official interest rate -- similar to pricing a tracker mortgage.
Eircom said the payment was being withheld because more senior lenders to the company had exercised their rights to suspend payment.
Eircom has breached "covenants" or terms and conditions attached to these more senior loans, giving the top lenders a veto over how the company manages its finances.
Last night's decision is a first step by these top-ranked lenders in a process they hope can lead to the cancellation of more than €1bn of the Eircom debts, including the €350m "FRNs."
Eircom's debts are unsustainable, its owners have already walked away from the business because of the crisis and top lenders hope to take full control of the business for themselves after the covenants on their loans were breached.
If they do, they will want the bulk of debts owed to themselves repaid over time, but debts owed to other lenders cancelled.
That process will have to take place in court -- potentially through an examinership.
Last night, sources involved with holders of the €350m of bonds affected by the latest blow said they were working on a legal plan to try to prevent their debts being written off.
A group representing 60pc of the FRN holders has hired US law firm Cadwalader as legal advisers.
Now sources say a missed interest payment gives them an opportunity to mount a legal challenge to the efforts to write off their loans.
Legal options will be limited, however, because the FRNs are not secured against Eircom's assets and the company and its more senior lenders will argue that forcing Eircom to honour its bonds would endanger the entire company.