The roller-coaster ride that has rattled telecom bond owners this year is poised to take another sto...
The roller-coaster ride that has rattled telecom bond owners this year is poised to take another stomach-churning drop as Germany begins auctioning its mobile phone licences next week.
The initial downswing for phone bonds came in April when the UK Government extracted £22.5bn ($34bn) from the five successful bidders for its licences. The right to persuade phone users they need to access the internet through their handsets began to look like a luxury the bond market could not afford to finance.
Then borrowers began to offer extra interest to compensate for any cut in their credit ratings. Deutsche Telekom found buyers for the biggest corporate fundraising effort ever, borrowing almost $15bn. And a Dutch licence auction stalled at E2.7bn ($2.5bn), short of the E10bn the Dutch government was expected to get for its five permits.
Analysts trimmed back their estimates of how much companies might pay to buy licences elsewhere in Europe. Talk of the German government raising E60bn or more began to fade.
So phone bonds rallied. Vodafone Airtouch's E1.5bn of 5.75% 2006 bonds yield about 97 basis points more than government debt, down from a high of 110 basis points a month ago. Telstra's E1bn of 5.875% five-year bonds yield about 94 basis points more than government bonds, down from 105 basis points a month ago.
But the German sale is not like the Dutch auction. The potential for mobile phone operators to make money in Germany, deemed by telecom analysts to be potentially the most lucrative of the European markets, is much greater than in the Netherlands, so competition will be fiercer.
The German auction rules are designed to maximise the revenue gained, whereas features of the Dutch sale made it easier for firms to forge alliances and keep their bids low. With five companies already entrenched in the Dutch market, there was little incentive for a newcomer to try and win one of the five permits, as the incumbent could come back and outbid the upstart.
In Germany, by contrast, the companies already active have deep pockets and a strong incentive to make it too expensive for new entrants to buy their way into the market.
Deutsche Telekom's willingness to pay top dollar to expand its customer base should trigger alarm bells among telecom bondholders. Paying $50.5bn in cash, stock and assumed debt for US company VoiceStream Wireless translates into more than $24,000 per subscriber, about 3.6 times what France Telecom is paying for each customer of Orange and seven times what Vodafone paid when it bought AirTouch Communications.
While there is lots of potential in the US, that price means Deutsche Telekom is hardly likely to balk at raiding the piggybank to ensure it gets its own way on home ground.
The more expensive the German permits are, the more new bonds phone companies are likely to sell in the coming months, swelling a pipeline that is already bulging with potential new issues.
Moreover, there are a further 15 European countries planning to sell more than 75 cell phone licences. Italy's sale comes hard on the heels of Germany's, and Italy has tailored its rules to ensure there is one fewer licence than there are bidders, ensuring a fierce dogfight in a market where it is not uncommon for people to have two or three mobile phones each.
Groups will have to boost their bids by at least 5% in the early rounds of bidding and then 2% in the final round. They can raise the amount pitched by as much as 50% of the lowest bid from the five highest in the preceding round.
Once the German and Italian sales are out of the way, Moody's Investors Service and Standard & Poor's are likely to deliver verdicts on the pile of phone companies they have got on review for possible downgrades.
So the telecom bond market faces lower credit ratings, increased supply and a German mobile phone licence auction that some analysts reckon could reach $58bn. Time to reach for the motion sickness pills.
Mark Gilbert Bloomberg newsroom
First mentioned in Cridland Report
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