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 ben.edwards@dowjones.com