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Telecom Italia Redeems Bonds Early on Moody’s Rule Change

Telecom Italia Logo Sits on a Public Payphone
The Telecom Italia logo is seen on a public payphone, operated by Telecom Italia SpA, against the backdrop of the Italian housing in Brittoli. Photographer: Marc Hill/Bloomberg

Jan. 29 (Bloomberg) -- Telecom Italia SpA plans to redeem 750 million euros ($1 billion) of hybrid bonds early because of changes to the way the securities are treated by Moody’s Investors Service.

Italy’s biggest phone company will buy back the hybrid bonds, sold last year and due in 2073, on March 3 at 101 percent of the principal amount of the securities plus interest due, the Milan-based company said today in a statement. The securities declined 0.8 cents on the euro to 101.25 to yield 7.88 percent, according to Bloomberg generic prices.

Moody’s said in July that it would consider hybrids of speculative-grade companies to be entirely debt, rather than half equity as was the case for all issuers. Telecom Italia’s rating was cut to junk by Moody’s in October, while Standard & Poor’s also ranks the debt as non-investment grade.

“Telecom Italia made the right choice to reimburse its hybrid bond in advance since the company, after Moody’s downgrade, no longer has any benefits in maintaining it,” said Angelo Drusiani, who helps manage about 3 billion euros of securities at Banca Albertini Syz & C. in Milan.

Chief Executive Officer Marco Patuano, who took over from Franco Bernabe in October, has sold the company’s Argentine business, some mandatory convertible bonds and unveiled plans to dispose assets including wireless towers and a broadcasting unit to help adjusted net debt of more than 28.2 billion euros at the end of September. The company reported 5.4 billion euros of net cash and cash equivalents.

ArcelorMittal Redemption

Patuano told reporters this week that there is no “hypothesis” for a capital increase at Telecom Italia, after Egyptian billionaire Naguib Sawiris told Bloomberg News that he is ready to step in and invest in Telecom Italia and that the carrier needs a capital increase of at least 3 billion euros.

ArcelorMittal last week became the first company to fully exercise its option to redeem its hybrid bonds because of the change in how ratings firms treat them, according to Societe Generale SA. The company called its 8.75 percent notes at 101 cents on the euro, the price set in the prospectus, or about 7 cents on the euro below the market price.

Other that ArcelorMittal and Telecom Italia, companies with hybrid bonds outstanding either are unlikely to be downgraded to junk or the documents don’t allow them the option of calling the bonds because of changes in ratings methodology, ING Bank NV analyst Aengus McMahon said in a note.

Shares of Telecom Italia rose 2.1 percent to 83.1 cents at 10:37 a.m. in Milan. The stock had gained 15 percent this year through yesterday.

To contact the reporters on this story: Daniele Lepido in Milan at dlepido1@bloomberg.net; John Glover in London at johnglover@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net

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