Telefonica to Swap EU2 Billion Preferred Shares for Bonds

Telefonica SA plans to swap 2 billion euros ($2.6 billion) in preferred shares for bonds and treasury stock, a move that will help the debt-ridden Spanish phone company lower financing costs.

The carrier offered to buy the securities at 100 percent of nominal value in cash, it said yesterday. The offer by Europe’s most indebted phone operator is conditional upon investors using the money they receive to buy newly issued bonds and shares currently held as treasury stock. The preferred shares count as liabilities on Telefonica’s balance sheet.

Chief Executive Officer Cesar Alierta is reversing a decade-long expansion strategy by selling assets to avoid a reduction of debt ratings. The exchange of preferred shares into common stock will reduce the debt showing up on Madrid-based Telefonica’s balance sheet and help boost capital, said Francisco Salvador, a strategist at FGA/MG Valores.

“This move will help Telefonica to continue improving its financial structure as it will be able to reduce its debt,” he said via phone. “The swap will also allow the company to cut its financing costs.”

The preferred shares are valued at 2 billion euros, according to Telefonica’s annual report. If all holders accept the offer, about 40 percent of the total will go into treasury shares and 60 percent into new bonds. The deal will help Telefonica cut 800 million euros of debt.

Lower Charges

“If fully tendered, the group will both lower its interest charge and optically reduce its leverage as these preferential shares did not quite qualify as equity either under GAAP accounting rules or for rating agencies,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at London-based FM Capital Partners Ltd. “It’s a natural step toward optimizing the balance sheet which the market should welcome.”

Telefonica added 0.2 percent to 10.18 euros at 11:27 a.m. in Madrid . The stock has declined 24 percent this year, compared with an 8.5 percent decline in Spain’s benchmark IBEX 35 index.

The company, which raised 1.45 billion euros this week selling shares in its German unit, has canceled its dividend and a share buyback plan for this year. As it struggles to reduce more than 58 billion euros of debt, Telefonica also plans to spin off its Latin American business. In July, it divested a $1.4 billion stake in China Unicom (Hong Kong) Ltd.

Moody’s Investors Service ranks Telefonica’s long-term debt Baa2, the second-lowest investment grade, with a negative outlook. Standard & Poor’s said last month it may reduce Telefonica’s BBB rating, the equivalent of Moody’s, citing the company’s exposure to Spain’s sovereign-debt risks.

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