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Telecom sweetens offer to retail bondholders

Telecom has decided to sweeten its offer to retail investors holding $541.7 million in NZX-listed bonds after objections from a group of brokers and fund managers.

Thursday, September 22nd 2011, 9:37AM

by Jenny Ruth

Holders of Telecom's listed bonds, whose maturities range from March 2013 to March 2016, are now being offered protection if "new" Telecom's credit rating falls below "A-" after its Chorus network business is split off into a separate company.

If "new" Telecom's rating falls to "BBB+" on Standard & Poor's ratings scale or "Baa1" on Moody's scale, bondholders will be entitled to a 50 basis point increase in their annual interest rate. If the company's rating falls another notch to "BBB" or "Baa2," bondholders' annual interest rate will increase by a further 50 basis points.

Telecom has also doubled the one-off "consent fee" for bondholders who vote in favour of the Chorus spinoff to 0.5%.

As said last week, the major objection to the initial offer was that the retail bondholders were not being properly compensated for relinquishing the reliable income stream they currently enjoy from the Chorus business. After the split, they will only be able to rely on those parts of Telecom subject to intense competition and constant price deflation.
S&P had already said it would downgrade "new" Telecom's rating to "A-" from the "A" rating Telecom currently enjoys. The revised offer means bondholders are being offered reasonable protection against further ratings downgrades.

The current coupons on the Telebonds range from 6.92% for the bonds maturing in March 2013 to 8.65% for the bonds maturing in June 2015.

Max Brown, head of fixed interest at Forsyth Barr welcomes the revised offer, saying it's much fairer to bondholders.

"The precedent that (the initial offer) would have set would have been very disappointing for the bond market going forward," Brown says.

Andrew Blackler at BT Funds Management also welcomed the sweetened offer.

While he would have preferred a coupon adjustment to the "consent fee" concept, given the time constraints facing Telecom - bondholders are to vote on the de-merger on September 30, ahead of the vote by Telecom shareholders scheduled for November 14 – the revised offer is the next best outcome, Blackler says.

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