KPN To Extend Investor Base With Euro, Sterling Hybrid Bond

By Carol Dean

Dutch telecommunications company KPN NV (KPN.AE) is looking to boost its capital while diversifying its investor base through selling sterling and euro debt in the second ever European telecom hybrid bond sale.

The fact that KPN has decided to borrow in sterling, since it has no business operations in the U.K., is seen as an opportunistic move by the company to extend its investor base. However, the company is no stranger to the sterling debt market with GBP1.775 billion of debt outstanding from four previous debt sales, according to analysts at CreditSights.

"There's quite a deep investor base in sterling and the sterling market tends to like longer-dated debt," said Mark Chapman, telecommunications analyst at CreditSights. "This is a large company relative to its domestic (Dutch) market so they can't just rely on their home market for funding," said Mr. Chapman, adding that the company has proactively diversified its investor base for some time.

KPN is the second European telecommunications company so far to raise funding with a hybrid bond, following in the footsteps of Telekom Austria AG (TKA.VI) in February. To date utility companies have been strong advocates of this type of debt funding.

The bond is part of KPN's 4 billion euro ($5.24 billion) capital raising plans that include a EUR3 billion rights issue. With KPN's rights issue fully underwritten and backed by KPN's major shareholder, America Movil, its plans to raise up to EUR4 billion in capital are looking fairly assured.

While the Dutch company is currently rated as investment grade by all three ratings companies, at Baa2 by Moody's Investors Service Inc., BBB- by Standard and Poor's Corp. and BBB- by Fitch Ratings, the hybrid bond is typically rated a few notches lower, pushing its rating into high yield territory.

KPN intends to raise EUR2 billion in hybrid securities in euro and sterling tranches over time. The upcoming hybrid securities are proposed to be deeply subordinated and to rank senior only to KPN's ordinary shares.

The market for new corporate hybrids has seen its strongest start to a year in 2013. KPN follows deals in January from Veolia Environnement SA (VE), Electricite de France SA (EDF.FR), and Telekom Austria. Spanish utility company Iberdrola SA (IBE.MC) pulled in around EUR3 billion of demand from investors for EUR525 million of hybrid bonds earlier this month.

Telecom Italia (TI) is also planning to issue up to EUR3 billion in hybrid debt over the next 18-24 months although the company postponed an issue last week ahead of the Italian elections and following its downgrade by Moody's during the company's roadshow.

Hybrid bonds combine aspects of both debt and equity, and in the event of a default pay out after more traditional corporate bonds. Investors are paid for this higher level of risk.

Hybrids are attractive to companies because the equity component strengthens their balance sheets without diluting existing shareholders. They also bolster the issuer's credit rating.

Deutsche Bank, Goldman Sachs and JP Morgan are the banks managing the bond issue.

Write to Carol Dean at [e-mail]

(Serena Ruffoni contributed to this article.)