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Investors reassured by falling cost of insuring Eircom loans

The cost of insuring loans to Eircom against default fell yesterday, prompting speculation in the market that a debt restructuring proposal could be imminent. But sources involved with the company say the rumours are wide of the mark.

The cost of credit default swap (CDS) contracts for Eircom fell yesterday, two lenders to the company told the Irish Independent.

The CDS contracts will repay the most senior lenders to Eircom if the company defaults.

The change in the market value of the contracts suggests investors are less nervous of a default on the loans.

Eircom is expected to bring forward a proposal to tackle its €4bn debt burden in the coming weeks, so the price move prompted speculation a plan could be imminent.

One creditor said speculation in London last night was focused on the possibility of Eircom's owner, STT, injecting up to €40m of cash into the company so that it avoids breaching the covenants, or conditions, on its loans.

The technique is known as an equity cure and is popular with lenders because it does not involve any haircut, or losses, for any creditor.

However, a source at Eircom said there was no evidence that a proposal on the debt was ready to be announced.

Equity cure

Another source involved with the company said that an equity cure was unlikely given the amount of debt that Eircom is currently carrying.

The source cited the example of music giant EMI as reason not to proceed with a "cure".

Last year, EMI's owners injected £105m (€120m) in cash to avoid breaching covenants on its £4bn of debt -- but they are now set to write off that investment and lose control of the company anyway because it did not tackle the company's overall debt structure.

The same source said a more radical deal that imposed losses on some creditors was a more likely outcome, but did not comment on the timing.

In the secondary debt markets, loans to Eircom rose from 83pc to 85pc of face value at the same time and more high-risk bonds were lifted from 38pc of face value to 40pc.

The strong performance sparked speculation that the company could be close to announcing a plan to tackle its €4bn debt burden.

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