Debt Defying

European Telecoms pressing on

Despite market concern over the heavy debt loads of European telecom players, British Telecom had no trouble attracting investors to two of the biggest bond offerings on record — totaling nearly $20 billion.

BT raised $10 billion in the capital markets in early December and another $9.15 billion this month, all amid cautionary tales by analysts that existing debt was contributing to downward stock valuations.

France Telecom last week devalued its planned February equity offering in its Orange mobile phone unit. It had projected that value at $131 billion late last year, but set a price that now values the unit at between $51 billion and $61 billion. FT plans to sell 15 percent of the entity, and analysts said they are watching the offering as another indicator of confidence in the international telecom sector.

Lower than expected earnings performance by Deutsche Telecom, announced last week, also added to the analysts jitters.

But BT officials said that they are not surprised by the investor reaction, and characterized it as an endorsement of the companys business plan. Andy Longden, treasurer at the BT Group, called the response "an astonishingly successful offering, demonstrating a huge appetite by investors for BT bonds."

Company officials said they plan to use the proceeds in part to replace more expensive, short-term bank debt, essentially exchanging an overdraft for a mortgage.

Stuart McIntosh, a London-based telecommunications analyst at Adventis, said the two bond offerings are components of BTs strategic internal restructuring, which was launched late last year. He said the new debt would help finance higher-than-expected costs for next-generation wireless licenses and allow the company to continue to meet aggressive network build-out commitments.

"BT and one or two others have pushed their debt to historically high levels." McIntosh acknowledged. "But BT has a fairly rich investment agenda ahead of them." He said that the company has taken steps to improve the balance sheet.

Investor confidence in infrastructure builders overseas has also been reflected in the U.S. Some competitive local exchange carriers saw new capital dry up last fall, but strong facilities-based CLECs, and others that have established revenue streams, seem to be escaping that cash crunch.

Wireline and wireless carriers and cable television companies jumped into the debt markets in January, reviving even the junk bond business, which was frozen at the end of 2000. Level 3 Communications and 360 Networks each have filed shelf offerings for $3 billion in high-yield bonds, while Sprint has a $2 billion offering on the boards.

Global Crossing, the big international fiber network company, jumped quickly into the improved debt market in January to sell $1 billion worth of high-yield bonds. Funds will be used to retire some more expensive debt and add to the $7 billion Global recently received from selling Global Center to Exodus Communications.

McLeodUSA, the well-regarded CLEC, started the rush Jan. 4 with a $750 million junk bond sale. XO Communications followed six days later with a $517 million deal.

The companies that have been able to sell or do shelf registrations of bonds, and in some case equity sales, have been the stronger businesses, agreed John Page, an analyst at Moodys Investor Services. "A step down and there are still issues with many of these companies," he said. Companies that cant sell either high-yield or investment-grade bonds will have to struggle through the coming months by managing their finances, Page said.