KPN Joining Hybrid Bond Rush With Up to $2.6 Billion Issue

Royal KPN NV (KPN) became the seventh European borrower to sell hybrid bonds this year as the biggest Dutch phone company seeks to bolster its balance sheet.

KPN, part-owned by Carlos Slim’s America Movil SAB, is raising as much as $2.6 billion in three currencies, said a person familiar with the matter. Today it sold 1.1 billion euros ($1.43 billion) of perpetual bonds yielding 6.25 percent that can be called after 5 1/2 years and 400 million pounds ($602 million) of 60-year notes at 7 percent that can be redeemed in seven years. KPN may also sell notes in dollars.

Electricite de France SA and Spanish power company Iberdrola SA (IBE) led a record 9.3 billion euros of hybrid sales in Europe this year, according to data compiled by Bloomberg. The high-yielding securities, which combine characteristics of debt and equity, appeal to investors facing record-low interest rates.

Telecommunications companies are using hybrids “as a means to shore up their balance sheets and reduce debt in order to maintain credit ratings,” said Priya Viswanathan, a credit analyst at Societe Generale SA in Bangalore.

Stefan Simons, a spokesman at The Hague-based KPN, declined to comment on the deal.

Hybrid notes allow companies to borrow without putting their credit grade at risk because ratings firms count 50 percent of the bonds as equity, reducing their assessment of an issuer’s indebtedness.

Debt Reduction

KPN said last month it intends to raise 4 billion euros of equity capital to reduce net debt and support operations. The fundraising will include a 3 billion-euro stock offering as well as hybrid bonds, the company said. KPN, which reported debt exceeded earnings by three times in the fourth quarter, wants to cut the ratio to 2 to 2.5 times by the end of 2013.

Standard & Poor’s downgraded KPN to BBB- on Feb. 8, citing weaker-than-expected profit in the fourth quarter.

KPN’s euro-denominated hybrid notes are provisionally ranked Ba1, one step below investment grade, by Moody’s Investors Service and a level lower at BB by Fitch Ratings.

The bonds would look attractive at a yield of 6.5 percent, Malin Hedman, an analyst at ING Bank NV in Amsterdam said today, based on where Telekom Austria AG (TKA)’s hybrid debt is currently trading. The Vienna-based company was the first telecommunications firm to issue hybrid securities this year, selling 600 million euros of 6.625 percent notes on Feb. 1.

National Grid Plc (NG/), the operator of energy networks in the U.K. and North America, is also planning to sell hybrid bonds. The utility started meeting investors in Europe and Asia on March 4, according to people familiar with the plan. The proceeds will be used for general corporate purposes.

Pennon Group Plc (PNN) was the first British utility to enter the hybrid market this year, selling 300 million pounds of variable- rate notes on March 1.

To contact the reporter on this story: Katie Linsell in London at klinsell@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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