Green Shoots Appear as Greece's OTE Tests Bond Markets

   By Serena Ruffoni 
 

Hellenic Telecommunication Organization (HTO.AT), or OTE, today announced its intention to issue a new five-year bond, using the proceeds to buy back its old bonds maturing in 2013 and 2014, as growing investor confidence that Europe is on the mend opens financing opportunities for companies in the euro zone's most crisis-hit countries.

The proceeds of the new bond, due to price Wednesday, will be used to buy back the company's old bonds, now close to expiry date. OTE has launched an offer to buy back its 5.00% bond maturing in August 2013--of which 1.25 billion euros ($1.68 billion) is outstanding--and its 7.25% bond due August 2014 with EUR500 million outstanding, at a market price of respectively 100 and 102 of face value

It is rare for a Greek company to finance itself in the bond markets. Italian, Spanish, Irish and Portuguese companies have been able to re-access the debt markets after their cost of borrowing spiked to unsustainable levels for a large part of the last two years. Increased confidence in Europe after the ECB said it would support the euro and investors' demand for higher-yielding debt also enabled Portuguese companies and banks, that have a credit rating below investment grade, to successfully issue bonds last Autumn.

Greek companies have largely been shunned by investors as their country sank under the weight of its debts and plunged into a severe recession.

But Deutsche Telekom (DTEGY) owns a 40% stake in OTE and the heavy weight's backing substantially improves OTE's chances of successfully issuing a bond in the international debt markets. Investors have always believed the German telecom giant wouldn't give up on its investment easily and would support the company through hard times.

"There has always been an implied support of the company by Deutsche Telekom," said Mark Chapman, an analyst at CreditSights.

The support for OTE from its parent comes because it is a performing company, despite being tied to its country's challenging economic landscape.

According to its latest available third-quarter 2012 results, the company slightly increased its earnings before interest, tax, depreciation and amortization, or Ebitda, for the first nine months last year despite revenues being hit by Greece's severe recession. Cash flow generation has increased too, and the company has diversified operations in Romania, Albania and Bulgaria. OTE also executed harsh cost-cutting measures, spearheaded by Deutsche Telekom. On Monday, the company announced 1,500 voluntary redundancies.

OTE's old investors will be encouraged to subscribe to the new bonds and those who do will be given priority for payouts under the old bond tender.

"Many OTE investors are in the hedge fund community," said one investor who used to own OTE bonds. "They will be happy to be paid out on their old bond holdings but it remains to be seen if they would want to commit themselves to the new one," he said.

This year, increasingly risk-indifferent investors have already been on a bond-buying run in the hope of catching substantial returns going down the credit rating scale. The European high-yield market, home to many companies in the euro-zone's troubled economies, has been particularly active with new borrowers looking to exploit the favorable climate.

Analysts at CreditSights calculate that the yield on this new bond could reach 7%-8%, providing a substantial return. The average yield an investor can get in the iBoxx Euro High Yield index is 5.4%, according to index-owner Markit.

OTE is not the first Greek company to test the bond markets, but it is the first truly domestic one to do it on a large scale. According to its results, almost 65% of its revenues and more than 65% of its Ebitda are generated in Greece.

Late last year, dairy company FAGE transferred its headquarters to Luxembourg from Greece and executed a $250 million increase to its bond that matures in 2015. Although international in scope with significant operations in the U.S., it needed to reassure investors its fate was separate from that of its former home country. Greek cement maker Titan also managed to issue a small EUR200 million bond early this year mainly by exchanging old bonds for new ones.

According to the International Monetary Fund, one of Greece's main creditors alongside the European Union, Greece's economy is expected to shrink 4.2% this year, projected as the sixth year of consecutive recession.

Ratings for OTE are Caa1 by Moody's Investors Service Inc. and B- by Standard & Poor's.

BNP Paribas, Deutsche Bank and HSBC are lead managers on the projected bond issue.

Write to Serena Ruffoni at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires