Issuing in Greece in the current climate is a brave move, but that did not stop telecoms company OTE entering the market earlier this year, thus posing quite a challenge for joint lead manager BNP Paribas.

On the bond investor’s map of the world, Greece is currently signposted “dragons”. Yet the Greek corporate debt capital market was reopened ever so briefly this year with a €500m issue by telecoms operator OTE, on the heels of a sovereign downgrade. Tellingly, its success owed much to the fact that it is not seen as an entirely Greek credit.

“It was a classic example of corporate risk versus sovereign risk,” says Rupert Lewis, head of corporate syndicate at BNP Paribas, one of five joint lead managers for the transaction. “The sovereign could never have been a benchmark for this deal.”

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On the face of it, OTE is very Greek indeed. It is the country’s dominant telecoms provider, with interests in nearby Romania, Albania, Bulgaria and Macedonia, and was once a state monopoly. It began being privatised in 1996 with listings on the Athens and (later) New York stock exchanges, though poor liquidity prompted a delisting from New York last year. But a key date for investors was 2008, when German telecoms operator Deutsche Telekom acquired a 25% holding, since increased to 30%. It hasn’t done much good for Deutsche Telekom’s recent results, but the structure of its involvement and its own recent comments indicate its ongoing support for the Greek business.

Put option

While the Greek state still owns 20% of OTE’s shares, it has a put option to sell half of that stake to Deutsche Telekom before the end of this year. The price would be at a 15% premium to the average share price over the previous 20 days. Such a sale now seems more likely, given the Greek government’s recent promise to press ahead with privatisations about which it had previously been saying much but doing little. Immediate asset sales, it said in May, would include stakes in OTE, Postbank and the ports of Athens and Thessaloniki. Some bankers and European politicians such as the Dutch finance minister now want such disposals to be handled by an outside agency.

It is not that Deutsche Telekom is desperate for more stock. It already consolidates OTE’s accounts and has effective management control. It has the right to nominate half the board and the CEO. OTE’s CFO, Kevin Copp, is a former Deutsche Telekom head of mergers and acquisitions. So although the Greek state retains certain rights of veto – some of which it loses if its stake drops below 10% – OTE is already, for better or worse, Deutsche Telekom’s creature.

OTE had net debt of about €4.3bn at the end of 2010 and began this year looking at imminent maturities on two bonds requiring payments of €2.05bn. “In February, the company closed a €900m revolving loan facility, the largest ever for a Greek company,” says Edoardo Ravá, a member of BNP Paribas’s corporate debt capital market team covering Italy and Greece. The two-year facility, including a one-year extension option, pays interest at Euribor plus 500 basis points (bps) and was provided by eight Greek banks and eight international banks. The company said that it intended initially to draw down €600m to help repay one of its expiring bonds.

“OTE’s continued access to external financing proves that the group can continue to fund itself on a standalone basis,” declared CEO Michael Tsamaz at the time. His CFO would repeat the observation after the bond issue that was yet to come.

Enter BNP

The group has cash of some €1bn, though only half of it is immediately accessible, and Deutsche Telekom recently provided a one-year backstop facility of €150m. But more was needed and the company wanted to show that it was capable of standing on its own two feet in funding terms. BNP Paribas had been a first-time lender to the company on the €900m revolver. Given the bank’s track record in corporate euro capital market transactions, this opened the way to dialogue on a bond issue, for which the bank was mandated as a lead manager. Alongside it were Alpha Bank, EFG Eurobank, HSBC and Morgan Stanley, all of whom had participated in the revolver.

This was not going to be a sure thing. No Greek corporate had come to the international bond market with a new issue since 2009 and OTE’s last visit was in 2008, when it sold two bonds – one for €1.5bn, maturing this year, and another for €650m due in 2015. The coupons were, respectively, 5.375% and 6%, representing 160bps and 195bps over mid-swaps. At the time the company was rated Baa1/BBB+, though it had been downgraded to Baa3/BB before the latest bond issue.

At the end of February, OTE reported its 2010 results, which were less than inspirational. After an additional pensions provision and a RomTelecom impairment charge the group posted a net loss for the fourth quarter, while falling revenues added to a drop of over 20% in annual earnings before interest, taxes, depreciation, and amortisation (EBITDA). There was a delay while the company’s global medium-term note programme documentation was updated with the results, but the teams were ready for launch towards the end of March.

Cold reception risk?

The Greek backdrop continued to worsen, raising further questions over the likely warmth of the market’s reception. Coca-Cola Hellenic had succeeded with a €300m tap in February, but the credit is seen as barely Greek at all, with only some 10% of sales in Greece itself. For OTE, on the other hand, Greece still accounts for 65% of fixed-line and mobile revenues. Matters were not helped by the fact that Standard & Poor’s had just downgraded Greek sovereign debt by two notches to BB- (and Portugal’s by one to BBB-). A few weeks earlier, Moody’s had slashed Greece’s rating by three notches to B1.

A number of Portuguese corporates had issued bonds earlier in the year but that was before Portugal agreed to an EU/International Monetary Fund bailout. “The Portuguese deals had shown there was an appetite for challenging situations, even though a lot of the demand was technically driven,” says Mr Lewis.

The mandate was announced on the first Monday in April, the same day as Standard & Poor’s – which had OTE on 'negative' watch – confirmed its BB rating and said that the unsecured notes would be rated in line. “The company hadn’t wanted to risk issuing a bond only to have a Standard & Poor’s downgrade a few days later,” says Mr Ravá. “That gave us the momentum to open the books.”

The announcement was followed by a conference call with CFO Kevin Copp, who discussed the results. He also informed the 140 or so investors who took part that, while Deutsche Telekom was not guaranteeing the debt, it was putting up the €150m backstop and would ensure that OTE could meet its 2011 maturities. The level of support that Deutsche Telekom was demonstrating for the company was absolutely key for investors.

Pricing was always going to be important here and would reflect the same tensions as the rating, which is effectively a trade-off between the sovereign and Deutsche Telekom. “We had to ask whether investors would see this as a stand-alone credit in a country with challenging circumstances, or as part of the Deutsche Telekom world, an asset that it would support going forward,” says Mr Lewis.

Tight-end issue

The books were opened for a likely three-year €500m deal with a price whisper of 7.5%, which then hardened into formal guidance of 7.5% area – plus or minus 12.5bps. Orders topped €1.8bn which allowed the issue to be priced at the tight end, at 7.375% or mid-swaps plus 469bps (the company’s 2013 paper was trading at plus 355bps). “We didn’t look at a new issue premium,” Mr Ravá explains. “It was more a question of what yield felt right compared with other high-yield names.”

The deal had a change of control clause but no step-up in the event of a downgrade – Moody’s downgraded OTE to a sub-investment grade Ba1 a month later. The issue’s timing was doubly fortunate, in that Portugal opted for a bailout within days of its closing. “Every time you draw a line in the sand, there’s more danger around the corner,” says Mr Lewis.

Nonetheless, in conditions that were hardly benign, OTE had successfully concluded an issue in benchmark size and shown that it retained access to good liquidity. “The deal was not oversized and the issuer did not try to squeeze out every penny,” says Mr Lewis. “That was very important for the company on its first time back in the market, and to which it should return within the next 12 to 18 months.”


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