Telecom Italia Shrugs off Election Woes with Delayed Hybrid Bond

   By Ben Edwards 
 

Telecom Italia SpA (TI) Wednesday is pressing ahead with plans to sell its delayed debut hybrid bond, only the second Italian company to sell debt in the international bond market since the country's inconclusive elections last month.

The Italian telecommunications firm is offering investors a yield of 7.875% for its 750 million euro ($977.1 million) hybrid bond, a type of security that sits last in the queue, though above equity, in the event Telecom Italia can't repay its debts.

That yield is 175 basis points more than Dutch telecom KPN NV (KPN.AE) sold hybrid bonds for last week, and 225 basis points more than Telekom Austria AG (TKA.VI) paid in January.

Even so, the extra yield Telecom Italia is offering may not be enough to compensate for the additional risk.

"It's the cheapest in the sector, but in terms of relative value considering the overall credit risk and where it's pricing versus its existing senior unsecured bonds, we don't see it as being particularly cheap from that standpoint," said Nancy Utterback, senior credit analyst at Aviva Investors.

"Telecom Italia is actually trading worse than the sovereign of late, so political instability could cause spreads to go wider," she said.

Aviva is waiting on final pricing before it decides whether to buy the bonds, Ms. Utterback added.

Market participants had expected Telecom Italia's hybrid bond to follow a week-long series of investor meetings in mid-February, but the company put off the sale ahead of the Italian elections and following its downgrade by Moody's Investors Service during the company's roadshow.

Italian car maker Fiat SpA's (F.MI) EUR1.25 billion, 6.625% five-year deal Tuesday may have encouraged Telecom Italia to press ahead with plans to sell the bond, said Jeroen van den Broek, credit strategist at ING Bank.

"They've already announced the transaction so they can't wait forever," he said.

It also comes on the same day as Italian utility Enel SpA (ENEL.MI) unveiled plans for a EUR5 billion hybrid bond program.

Enel's hybrid bonds are likely to be rated higher than Telecom Italia's and still be attractively priced, so it is possible Telecom Italia wanted to get in ahead of that, said Aviva's Ms. Utterback.

Telecom Italia is rated Baa3 by Moody's Investors Service--one notch above junk. Standard & Poor's and Fitch Ratings both rank Telecom Italia BBB. As hybrid bonds are a riskier form of debt, they are typically rated a few notches lower. Telecom Italia's hybrid bond is expected to be rated Ba2 by Moody's and BB+ by S&P and Fitch, all below investment grade.

Analysts had touted Telecom Italia's hybrid bond sale as crucial to the three-year plan the company put forward last month that would see it sell EUR3 billion of hybrid bonds over the next 18-24 months. It also plans to halve its dividend to EUR450 million for the next three years, and speed up cost-cutting measures. The aim is to improve its networks and address its debt load, which at the end of 2012 was EUR28.27 billion.

Hybrid bonds combine aspects of both debt and equity. This is attractive to companies because the equity component strengthens their balance sheets without diluting existing shareholders. Importantly, they bolster the issuer's credit rating because they are classed as partly equity by ratings companies.

Telecom Italia's deal is the third hybrid bond from a European telecommunications company this year following the Telekom Austria and KPN offerings.

The uptick in deals from telecommunications firms is likely to help preserve their credit ratings, Aviva's Ms. Utterback said.

Corporate borrowers in Europe have raised more than EUR9 billion from selling hybrid bonds so far this year, the most on record, according to Dealogic.

National Grid PLC (NG.LN) was the last, selling EUR1.25 billion and 1 billion pounds ($1.49 billion) of hybrid bonds Monday. KPN is currently meeting investors in the U.S. and Asia about a potential dollar hybrid.

Banca IMI, Barclays, BNP Paribas, JPMorgan and Mediobanca are among the lead managers of Telecom Italia's hybrid bond sale.

--Art Patnaude contributed to this article.

Write to Ben Edwards at [e-mail]