OTE Flips From Worst to First in Bond Rally: Corporate Finance

OTE Flips From Worst to First in Bond Rally
Hellenic Telecommunications Organization SA posted a 10-fold increase in first-quarter profit and benefited from expectations a new government will keep Greece in the euro area. Photographer: Kostas Tsironis/Bloomberg

Hellenic Telecommunications Organization SA has gone from being the biggest loser in Europe’s bond market to the best performer as its debt reduction plan kicks in and concern Greece will exit the euro recedes.

The phone company’s 3.25 billion euros ($4.1 billion) of bonds in the Bank of America Merrill Lynch Euro High Yield Index gained 13.15 percent in June, compared with an average return of 1.98 percent for the gauge. That’s a reversal from May, when the Athens-based borrower lost 18.7 percent and debt of Tokyo Electric Power Co. and Edison SpA of Italy led gains of as much as 3.51 percent.

OTE, as Greece’s biggest telecommunications operator is also known, appointed former National Bank of Greece official Babis Mazarakis as chief financial officer on June 28, three days after saying it may sell Bulgarian businesses to help lower its 3.4 billion-euro net debt. The 63-year-old company posted a 10-fold increase in first-quarter profit and benefited from expectations a new government will keep Greece in the euro area.

“The company is performing very well and as long as Greece stays in the euro it should be able to manage its situation and pay down debt through asset sales and free cashflow,” said Stuart Stanley, a fund manager at Invesco Asset Management Ltd. in London who oversees $3 billion of high-yield bonds. “If Greece exits, all bets are off.”

Bigger Jump

Hellenic Telecom’s most-traded bonds, its 1.24 billion euros of 5 percent senior notes due August 2013, have risen 28 percent since June 1 to 83.1 cents on the euro, according to Bloomberg Bond Trader prices. That’s a bigger jump than in any month since the securities were sold nine years ago, pushing the yield down to 24.8 percent from a record 60.4 percent on May 17.

The price regained 93 percent of its losses since it started falling at the end of March as Greece lurched through a political and banking crisis that threatened the future of the 17-nation currency union. Antonis Samaras was sworn in last month as Greece’s fourth prime minister since November after pro-bailout parties won more than half the seats in parliament and voters backed the country to stay in the currency union.

Kanakaris Konstantinos, a spokesman for Hellenic Telecom in Athens, declined to comment. He said that Mazarakis, who was CFO of National Bank of Greece from 2010 until last month, couldn’t be interviewed because he’d just started in the job.

Balkans Sales

OTE is mulling the sale of its Bulgarian phone company Globul and electronic goods retailer Germanos Telecom Bulgaria to “drastically reduce its future financial obligations,” it said June 25.

The company sold a 20 percent stake in Serbia’s former phone monopoly earlier this year. The sales of its units in the Balkans will provide about 850 million euros, estimated Vangelis Memos, a fund manager at Athens-based Ate Aedak.

OTE ended the first quarter with net borrowing of 3.4 billion euros, down from 4.3 billion euros a year earlier, it said in its May 10 earnings statement. The phone company said its strategy to refinance debt is “well underway” and that it intends to reduce borrowing while extending the maturity of the debt it keeps on.

Hellenic Telecom has a 445 million-euro loan and a 312 million-euro revolving-credit facility due in September, according to its website. The company said it has a 900 million-euro revolving credit, 600 million euros of which has been drawn and is due for repayment next year if a one-year extension option isn’t exercised. OTE’s overall debt totals 4.94 billion euros, according to data compiled by Bloomberg.

Profit Boost

Hellenic Telecom reported earnings before interest, taxes, depreciation and amortization of 1.7 billion euros for last year. Standard & Poor’s said in June it expects the company to maintain adjusted debt to Ebitda of 2.7 times for 2012.

OTE’s profit increased to 307 million euros in the first quarter of this year, from 30 million euros in the same period of 2011, it said in a statement on its website. Most of the increase came from a 211 million-euro gain from the company’s sale of a stake in a Serbian unit, while a rise in domestic mobile revenues to 377 million euros from 375 million euros also contributed.

“That it grew its mobile business in the first quarter is very impressive and gives me confidence that the company’s doing the right things to turn itself around,” said Sam Morton, a telecoms, media and technology analyst at Mizuho International Plc in London. Even so, “it’s not surprising that it’s been one of the most volatile names,” he said.

Bucking Trend

OTE has surged 76 percent since June 1 to 2.09 euros a share in Athens trading, valuing the company at 1.02 billion euros, Bloomberg data show. The stock is still down 25 percent this year and fell to an all-time low of 1.09 euros on June 5.

The rise in Hellenic Telecom’s bonds is bucking the trend of its European peers, whose debt lost an average 1.6 percent in June, according to Bank of America Merrill Lynch’s EUR Corporates, Telecommunications index. Investors view such companies as havens because of their geographical diversification and recession-proof services.

That means their bonds often decline when credit markets rally, as they did last month. Telefonica SA of Spain and U.K. telecommunications company Everything Everywhere Ltd. had the worst-performing bonds in the gauge, losing 3.66 percent and 2.3 percent in June, respectively. OTE tends not to be viewed as a haven because it’s Greek and 10 percent government-owned.

Euro Exit

Moody’s Investors Service downgraded OTE by one level to Caa1 with a negative outlook on June 11, meaning it’s a “very high credit risk,” according to the rating firm’s definitions. S&P lowered the company’s rating by one level to B-with a negative outlook on June 7. Fitch Ratings cut the grading by four steps to B- with negative watch on May 18, the day after it downgraded Greece to CCC from B-.

Fitch said in its May 18 report that a re-denomination of Greece’s currency following a euro exit would affect Hellenic Telecom’s ability to repay debt. “Euro-denominated debt holders would suffer the economic loss of a debt restructuring or forced redenomination,” analysts led by Mike Dunning in London wrote.

The election result may ease OTE’s efforts to get its banks to roll over the debt it has maturing next year, London-based CreditSights Inc. analysts David Watts and Mark Chapman said in a June 20 report. The outcome also increases the likelihood of support from OTE’s largest shareholder, Deutsche Telekom AG, which has a 40 percent stake, they said.

‘See Value’

“A Greek exit from the euro would likely cause a substantial sell-off in OTE bonds,” the analysts wrote. “We continue to see value for investors willing to weather significant further volatility.”

OTE’s 2013 bond rose 8 cents on the euro, or 11 percent, since the June 17 Greek election, Bloomberg Bond Trader prices show. The yield relative to benchmark German government debt narrowed to 25 percentage points from a high of 60 percentage points a month before the poll.

“The bonds have had an amazing rally due to the aversion of a Greek election disaster,” said Dimitris Dalipis, a fund manager at Alpha Trust Mutual Fund Management SA in Athens, who said he owns Hellenic Telecom’s notes. “I find it difficult for OTE to decouple from politics but it’s still a strong company with great fundamentals.”

The cost of insuring OTE’s bonds fell 40 percent since June 1, with credit-default swaps on the company dropping to 2,018 basis points from 3,366, data compiled by Bloomberg show.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt commitments. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year. A decline signals improvement in investor perceptions of a borrower’s creditworthiness.

“The main driver is the seeming stabilization of the political scenery in Athens following the new government,” said George Satlas, the Athens-based head of investments at the Mutual Funds of Postal Savings Bank and Hellenic Post, which owns the phone company’s bonds. “There could be room for some more upside, as long as confidence is strengthened.”

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