Oi Bonds Beaten by Portugal Telecom on Deal Concern
Telemar Norte Leste SA, Brazil’s biggest fixed-line telephone company, has less to gain from an alliance with Portugal Telecom SGPS SA than its European suitor, trading in the companies’ bonds shows.
Yields on Telemar’s 9.5 percent bonds due in 2019 fell 23 basis points, or 0.23 percentage point, to 5.88 percent since July 27, the day before Portugal Telecom agreed to pay as much as $4.8 billion for a stake in Telemar. The yield on 5 percent bonds due the same year from Portugal’s largest telecommunications company fell 32 to 5.08 percent. The gap widened 10 in the past week, the most since the five-day period ended June 28, according to data compiled by Bloomberg.
Portugal Telecom bonds are outperforming as the company invests in Telemar, known as Oi, to tap growth in the Brazilian telecommunications market after selling its holding in Vivo Participacoes SA, Brazil’s largest wireless operator. Telemar bondholders won’t benefit as much from the transaction because it’s aimed at fueling the Lisbon-based company’s growth, said Eric Ollom, chief emerging-markets strategist with Jefferies & Co. in New York.
“The positives are relatively small from Telemar’s perspective, and from Portugal Telecom’s perspective, it’s quite substantial,” Ollom said in a telephone interview. “It gives them access to a larger and faster growing market than their domestic market.”
Portugal Telecom’s Price
Portugal Telecom will pay a maximum of 8.4 billion reais for about 22 percent of Telemar, according to a July 28 company filing. As part of the agreement, Rio de Janeiro-based Telemar plans to sell 12 billion reais in stock to existing shareholders and acquire 10 percent of Portugal Telecom, replacing Madrid- based Telefonica SA as the Portuguese company’s biggest investor.
Telemar shares tumbled 23 percent in the two days following the announcement of the deal, the biggest two-day drop in almost four years, on concern issuing more stock will dilute earnings.
The transaction offers “limited” benefits to Telemar, according to a report from Barclays Capital on July 30.
“Management is selling this transaction as a way for the company to greatly reduce its leverage,” wrote Christopher Buck, a New York-based strategist with Barclays. “However, it appears that the reduction will be much less than the company has indicated. Beyond the short-term implications, the ‘alliance’ clearly has plans to re-leverage the company to pursue its capital spending and international acquisition strategies.”
Buck wasn’t available to comment.
Credit Ratings
Telemar is rated Baa2 by Moody’s Investors Service, the second-lowest level of investment grade, and one step lower at BBB- by Standard & Poor’s. Portugal Telecom has an equivalent Baa2 rating from Moody’s and is ranked one level higher at BBB by S&P. Both rating companies said the 12 billion-reais investment may improve Telemar’s finances if used to reduce debt.
The ratio of net debt to Ebitda — or earnings before interest, tax, depreciation and amortization — may drop to 0.8 times from 2.1 in the second quarter, following the capital injection from Portugal Telecom, according to a company presentation.
Telemar will be an “interesting hunter” for acquisitions, with a focus on emerging markets, after agreeing to sell the stake to Portugal Telecom, Chief Financial Officer Alex Zornig said on a July 28 conference call with investors and analysts.
Zornig may comment later today, according to Telemar’s press department.
Yield Gap
Portugal Telecom executives declined to comment, said a Lisbon-based spokesman who declined to be identified in accordance with policy.
The average yield gap on Brazilian corporate dollar bonds over U.S. Treasuries declined 6 basis points to 314 yesterday, according to JPMorgan’s CEMBI index.
The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. securities fell 9 basis points to 204, according to JPMorgan. The spread touched a two- month low of 202 on July 27.
The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps dropped four basis points to 113, the lowest level since April 21, according to data compiled by CMA DataVision. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
Yields on Brazil’s interest-rate futures contract due in January rose four basis points to 10.8 percent, indicating traders expected the central bank to raise its benchmark to 11 percent by year-end from 10.75 percent.
Brazil Real Rises
The real rose 0.2 percent to 1.7520 per dollar.
Telemar’s debt due in 2019 has risen 0.9 cent since July 27 to 123.5 cents on the dollar yesterday from 99.2 cents when it was issued on April 16, 2009. The yield, at 5.88 percent, is less than the 6.11 percent average on Latin American telecom bonds, according to Credit Suisse Group Inc. bond indexes.
Portugal Telecom’s senior unsecured debt denominated in euros has jumped 2.3 cents to 99.4 cents since July 27, Bloomberg data show.
Telemar had 32 billion reais ($18.3 billion) of debt at the end of June, according to the company. It has 2.6 billion reais maturing in 2011, Bloomberg data show. Portugal Telecom has a total of 5.2 billion euros ($6.9 billion) of debt outstanding, according to data compiled by Bloomberg.
“If Portugal Telecom and Telemar get married, credit could improve, but how much?,” Vinicius Pasquarelli, an emerging- market debt trader in New York with Tradition Asiel Securities Inc., said in an e-mail. Telemar bonds “should sit for a nice while,” he said.
