The convertible market is enjoying interest from TMT companies, as shown by Alcatel’s recent bond issue. Geraldine Lambe reports on the sector’s new-found confidence.

Last month, French internet equipment supplier Alcatel completed a E1bn convertible bond issue, taking advantage of low interest rates to refinance its debt. It follows a flurry of convertible deals from other companies in the technology, media and telecoms (TMT) sector including Lucent and Cable & Wireless.

“It is an infectious phenomenon that reflects optimism in the convertible market,” says Georg Grodzki, global head of credit research at Royal Bank of Canada.

“And of course it makes perfect sense for many companies. Bullish markets allow them to demand a relatively high conversion premium in spite of extremely low coupons. The convertible issue very effectively helped Alcatel to lower its overall cost of funds and to lengthen the maturity profile of its debt without overly diluting its shareholders,” he says.

Record conversion premium

Alcatel’s seven-year bonds will pay a fixed annual interest of 4.75% and can be converted to stock if the shares double from their price at the beginning of June to E16.18. The conversion premium of 100% sets a record in Europe. The proceeds from the sale will primarily be used for the partial repurchase of the company’s 2004 and 2005 bonds, which have interest rates of between 5.7% and 5.8%, enabling Alcatel to save tens of millions of euros in interest payments.

The issue shows that Alcatel is confident that the worst of the telecom sector downturn is behind it. Its credit spreads are performing well – figures from Credit Market Analysis show that the company’s five-year credit default swap spreads had tightened by 43% from 498 basis points to 280bps in the three months to June 17. Upturn or not, many believe that Alcatel is in a strong position.

Shrinkage preparations

“Alcatel appears well prepared to withstand any shrinkage in its core markets thanks to the aggressive cost reductions it has implemented and its liquid balance sheet,” says Mr Grodzki. “It is also benefiting from the telco companies’ increasing demand for broadband equipment, for which Alcatel is one of the market leaders.

“Therefore it has probably reached the low point in its credit cycle. Its credit spreads have already performed strongly over the past six months and if the company returns to profit – which is expected later this year – it should disproportionately benefit from the stabilisation of its core markets.”

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