[Comment] Telecom offers retail bond investors an inferior deal
Telecom is offering a decidedly inferior deal to retail investors holding its $541.7 million in NZX-listed bonds than it is giving institutional investors in its £275 million (NZ$530.2 million) bond issues.
Thursday, September 15th 2011, 9:43AM
by Jenny Ruth
Holders of Telecom's listed bonds, whose maturities range from March 2013 to March 2016, are not being offered any compensation, despite being asked to exchange their current position for a lower credit rating and reliance on a more risky income stream.
The listed bonds are to be allocated to "new Telecom" and will no longer have the benefit of the more reliable income stream from the Chorus network. Instead, they will have to rely on all those parts of Telecom subject to intense competition and constant price deflation.
As well, Standard & Poor's has said it will downgrade "new" Telecom's rating from "A" to "A-".
Instead of compensation, the bondholders are being offered a one-off "consent fee" of 0.25%, but only if they vote in favour of the spin-off of Chorus.
While holders of the listed bonds are overwhelmingly retail investors, institutional investors do have some small holdings. Andrew Blackler, New Zealand fixed interest manager at BT Asset Management, says he is concerned the different bond maturities are not being recognised and appropriately compensated.
He also objects to the "consent fee." "Unfortunately, that does mean, as opposed to voting on the merits of the offer, you have to acknowledge game theory," Blackler says.
In other words, before you vote, you have to make a judgment on how the majority will vote. There's little point in voting against on principle if the majority are likely to vote in favour - the vote requires 75% of those voting to succeed.
By contrast, holders of Telecom's £125 million worth of bonds maturing in 2018 are being offered a rise in their annual coupon from 5.625% to 6.75% and the maturity will be extended to 2020.
Holders of its £150 million worth of bonds maturing in 2020 are being offered a rise in their annual coupon from 5.75% to 6.75%.
Holders of both series are also being offered a one-off 0.5% "early voting fee," double the size of the retail holders' "consent fee," which is conditional on the demerger proceeding.
In another contrast, the British pound-denominated bonds will be assigned to Chorus. While Chorus will have a lower "BBB" rating from S&P and considerably more debt, institutional investors are much more likely to favour holding Chorus debt than "new Telecom" debt because of its much more reliable income stream.
Small wonder Telecom announced today it already has more than enough votes from holders of the British pound-denominated bonds to ensure the required 75% approval.
Andrew Michl, senior fixed interest manager at OnePath, says market pricing currently puts the difference between "A-" and "BBB" rated securities at about 50 basis points.
"Being a debt-holder in a regulated entity is not that bad a place to be," Michl says.
Michl reckons Telecom is taking advantage of the fact most of the listed bonds are in retail hands. "They're dealing with a client base which is relatively unsophisticated."
Those hoping the Financial Markets Authority (FMA) might intervene to protect the interests of retail investors are out of luck: while it will look at any suggestion of illegality, "FMA doesn't comment on the merits of any investment offer," it says.
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