The dual currency bond was split between £375 million, 10-year and €1 billion, five-year tranches. Final pricing came in at the tight end of the range. The deal benefited from strong market conditions, a lack of corporate supply and the view that telecoms supply in 2002 is forecast to be lower than in 2001.
The overwhelming interest in the deal was also in evidence in the credit default swap (CDS) market where, before the deal’s launch, CreditTrade brokered a five-year CDS close to the expected price.
But the initial euphoria over mmO2’s deal subsided in the aftermarket, as the euro paper traded up due to profit-taking and a general spread deterioration. “This issue traded up at Euribor plus 182bp/180bp soon after launch and a week later is around Euribor plus 200bp bid.” Says SocGen’s Mann: “The so-called ‘wall of cash’ argument – if it’s new it will be well bid – has certainly led to a few burnt fingers.”
The transaction’s success may have papered over cracks in mmO2’s creditworthiness, and although the company is under-leveraged questions remain over its future performance. One investor even described the credit as “high yield in drag”, reflecting the fact that ratings are finely balanced on the border of investment grade at Baa2/triple-B minus.
Steve Best, telecoms analyst at Japanese bank Nomura, says: “I would recommend a hold for six months – it has a good carry and grace period to prove itself. Germany is the focal point, how it will grow its subscriber base versus Vodafone and Deutsche Telekom and demonstrate an ability to generate cash in the future.”
Joseph D’Virgilio, vice-president, fixed-income research at SocGen, agrees. “The company is likely to face considerable competition in both the UK and the German wireless markets,” he says. “Without the benefit of the cashflow stability from the more mature, fixed-line businesses, mmO2 could have a greater challenge maintaining steady growth rates than the other European incumbents.”