KPN wipes the slate clean

Corporate bond investors are welcoming the Dutch telephone company KPN’s decision to write off a substantial proportion of its investments in third-generation mobile phone licences.

The company announced a €9 billion write-down in the value of its licences and customer base, in its second-quarter earnings released in late August.

Nigel Sillis, credit analyst at Baring Asset Management, says the write-down does not cost the company anything in cash and only brings the valuations into line with what investors had already attributed to them. In this sense the move is neither beneficial nor harmful to the company’s credit quality

However the management’s admission that these assets are no longer worth what was paid for them is a move welcomed by bondholders. Olaf Van Thull, a credit fund manager at Robeco in Amsterdam, says: “The write-downs show that management is aware of the situation. It is the right thing to do to make the balance sheet more realistic.”

The move was also welcomed for its conservative accounting approach. Andrew Winn, credit portfolio manager at Barclays Global Investors in London, says: “We are in an environment where good corporate governance is going to be rewarded by the market and conservative accounting practices are what investors want to see.”

“Though the move does not tell us anything new, it does clear the air,” says Sillis. “And they may have thrown down the gauntlet to mmO2, Deutsche Telekom and France Télécom to also write down the value of their assets,” he adds.

KPN is not the first European telecom company to reduce the value of its investments. And three weeks before KPN’s write-down, Telefonica of Spain and Sonera of Finland suspended operations at German mobile joint venture Quam, writing down €6.5 billion in the value of its assets.

Says Phillip Crate, head of credit research at Bear Stearns in London: “For an operator with a relatively weak market position, it is harder to defend the view that the licence still has value.” Nevertheless even Vodafone has written off the value of some of its licences but only for non-controlled subsidiaries.

The write-off means KPN reports a net loss of €9.3 billion for the quarter compared with €500 million in the first quarter. But Van Thul says: “The underlying figures from a bondholder’s perspective were good: further reductions in debts and increases in cashflow. While several in the telecoms sector are still dogged by heavy debt burdens – most especially Deutsche Telekom and France Télécom – KPN used a $4.8 billion rights issue last September to improve its own balance sheet. As a result debts have fallen from €23 billion at this time last year to €15 billion.

To coincide with the release of second-quarter earnings, KPN also hosted a conference purely for its bondholders – a move investors and analysts also applauded.

“It very positive, it shows the management understands that the bondholders are a serious part of the investment community, and that the company is not only focusing on shareholder value but bondholder value also,” says Robeco’s Van Thull. “There are definitely lessons for other telecom companies in what KPN is doing,” he adds.

And according to Bear Stearns’ Crate: “It’s all good for transparency. Most credit investors will have listened in on the equity call anyway, but it all adds to the transparency. In the question and answer session at the end, bondholders can focus on the company’s debt issues rather than some spurious growth question.”