Investors braced for wave of share issues as
 telecom debt matures

 Phone companies large and small are finding
 that equity is the only form of debt they can
 afford after the 3G spending spree

 By Chris Hughes, Financial Editor

 11 May 2001

 From British Telecom down
 to the recently floated
 alternative carriers, the
 European
 telecommunications industry
 is suffering horribly
 following its ambitious
 investment last year in
 next-generation technology.
 And as traditional methods
 of funding become more
 expensive, some companies'
 only hope of survival now
 lies in a rescue from their
 shareholders.

 Incumbent telecoms
 operators such as BT do
 not usually launch rights
 issues, which are generally
 seen among young
 companies lacking the cashflow that would allow
 them to issue bonds. But this year telecoms
 companies large and small are finding that equity is
 the only form of debt they can afford.

 In the autumn it was a very different story. Former
 telephone monopolies including BT, France
 Telecom, Holland's KPN and Spain's Telefonica
 issued bonds worth 25bn euros (£15.5bn) following
 the auctions for the UK and German third
 generation (3G) mobile phone licences.

 But the sums required to win the licences left the
 victors with crippling debts that have damaged their
 credit ratings. That has made it impossible to
 finance further bond issues, as the cost of servicing
 the existing bonds has risen sharply.

 Compounding the problem is the short-term nature
 of the debt. According to Deutsche Bank, some
 $45bn (£32bn) of telecoms debt matures this year ­
 more than double the comparable figure last year.
 That needs to be refinanced, and the depth and
 liquidity of the European equity market provides
 the best solution. "If you want to raise as much as
 tens of billions of euros, there are only two places
 to go ­ the debt or equity markets. Telecoms
 companies have exhausted the debt markets," says
 one corporate financier at a US investment bank.

 The telecoms giants hoped to avoid all this by
 raising cash from the sale of non-core businesses.
 But asset prices have crashed amid the realisation
 that last year's investment spree left Europe awash
 with telecommunications capacity. At the same time,
 analysts expect 3G to deliver smaller returns, and
 later, than previously thought.

 Mark Tinker, head of global debt and equity
 strategy at Commerzbank, says: "It's rather like
 buying a house on a credit card and then trying to
 sell the new family car to pay for it. Someone offers
 you £8,000 for a car when you reckon it's worth
 £20,000," he says. "But owing £30bn is not a problem
 per se. If the market regards a business plan as
 viable it will be happy to help a company
 restructure, but it will demand a price."

 So who will be next after BT to grasp the nettle?
 Analysts point to KPN, saddled with 22bn euros of
 debt, and France Telecom, which was forced to
 slash the float price of Orange in February, as
 among those most in need of issuing equity. Others,
 such as Deutsche Telekom, are constrained by
 government- held golden shares.

 There is only so much new paper investors can
 take. Fund managers typically devote a set
 weighting to the telecoms sector in their portfolio,
 never mind how many new shares flood the market.
 "The market should reward companies that go in
 early. If you get the finance, you are in a strong
 position. Companies that delay will find it a lot
 harder," said Mike Williams, telecoms analyst at
 Deutsche Bank.

 KPN has the lowest credit rating among Europe's
 former national phone companies; analysts say it
 would have to price a successful rights issue at a
 discount of as much as 60 per cent to its share price.

 Where does this leave the so-called alternative
 carriers, the small upstart telecoms networks? They
 too have been burning cash in the hope of carving
 a niche in 3G. Yesterday, Redstone Telecom, which
 floated in London in 1999, said it required fresh
 funds for the rollout of its broadband services. Mr
 Williams says if such companies find it hard to pull
 off rights issues this year, it will not be because of
 BT and the like have barged in ahead of them.
 "There is a very high degree of scepticism regarding
 the future of these companies," he says.

 The upstarts have one advantage over the former
 nationalised utilities ­ their more modest
 requirements means more scope for a rescue by
 speciality finance. So-called new technology
 convertibles, for example, have become hugely
 popular among alternative carriers in the US. They
 are bonds cost that almost nothing to service,
 convertible into shares in the future.

 "If you don't want to raise 15bn euros you have
 loads of options," says one corporate financier. "The
 US convertibles market is at its hottest in its
 history."

 Still shareholders in small and large telecoms firms
 are united in one respect: they can no longer expect
 the fat returns promised for these growth stocks this
 time last year.