France Télécom: performance spurt shows signs of abating

The plan to restructure France Télécom’s massive debt burden has been well received by investors, says Geraldine Lambe, and the resulting upgrade from Standard & Poor’s heralds the beginning of a more steady outlook for the company.

France Télécom’s upgrade from BBB- to BBB by Standard & Poor’s last month signals the end of the company’s big rally, beginning in October 2002, and the start of a more stable outlook for the French telco.

France Télécom’s recovery plan to halve its E70bn ($81.5bn) debt burden began last year with the appointment of a new CEO, Thierry Breton. Restructuring measures included a refinancing of its E15bn outstanding debt, a record E15bn rights issue, two bond issues totalling more than E8bn and various disposal and cost-cutting initiatives. The package has clearly succeeded in reassuring investors that France Télécom is an attractive credit.

Spreads tighten

According to figures from Credit Market Analysis, France Télécom’s five year credit default swap spreads have tightened by 47% (108 basis points – bps) during the past three months, but by the end of May it was just as clear that the company’s performance had slowed in the previous few weeks; not only have investors seized the opportunity to take out profits but, unlike most of its competitors, France Télécom does not produce quarterly results.

The S&P rating change did not have a big impact on the telco’s performance. “It was one of those seemingly perverse situations in which good ratings news is bad spread news, as some of France Télécom’s bonds have rating-sensitive coupons which decline if the rating improves.

“That weighs on spread performance, especially if there is not that much spread left,” says Georg Grodzki, global head of credit research at Royal Bank of Canada.

“Equally, the positive outlook had already been priced in so there has not been a significant shift in the bond’s performance.”

Best performing asset class

Mr Grodzki says that during the past three months, telecommunications has been one of the best performing asset classes and France Télécom was leading that recovery. However, in terms of basis points, MM02 has also performed extremely well, tightening from 290bps in February to 160bps by mid-May.

“If the restructuring initiatives continue to be implemented as promised, by the end of 2005, we could see France Télécom rated a high triple B or even a low single A,” says Mr Grodzki.

“But while it is out of the woods and downside risk has been severely reduced, it could still be sensitive to two-way movement. We could see it going downward if its half year performance figures aren’t as good as expected.”