Investors braced for wave of share issues as

 telecom debt matures



 Phone companies large and small are finding

 that equity is the only form of debt they can

 afford after the 3G spending spree



 By Chris Hughes, Financial Editor



 11 May 2001



 From British Telecom down

 to the recently floated

 alternative carriers, the

 European

 telecommunications industry

 is suffering horribly

 following its ambitious

 investment last year in

 next-generation technology.

 And as traditional methods

 of funding become more

 expensive, some companies'

 only hope of survival now

 lies in a rescue from their

 shareholders.



 Incumbent telecoms

 operators such as BT do

 not usually launch rights

 issues, which are generally

 seen among young

 companies lacking the cashflow that would allow

 them to issue bonds. But this year telecoms

 companies large and small are finding that equity is

 the only form of debt they can afford.



 In the autumn it was a very different story. Former

 telephone monopolies including BT, France

 Telecom, Holland's KPN and Spain's Telefonica

 issued bonds worth 25bn euros (£15.5bn) following

 the auctions for the UK and German third

 generation (3G) mobile phone licences.



 But the sums required to win the licences left the

 victors with crippling debts that have damaged their

 credit ratings. That has made it impossible to

 finance further bond issues, as the cost of servicing

 the existing bonds has risen sharply.



 Compounding the problem is the short-term nature

 of the debt. According to Deutsche Bank, some

 $45bn (£32bn) of telecoms debt matures this year ­

 more than double the comparable figure last year.

 That needs to be refinanced, and the depth and

 liquidity of the European equity market provides

 the best solution. "If you want to raise as much as

 tens of billions of euros, there are only two places

 to go ­ the debt or equity markets. Telecoms

 companies have exhausted the debt markets," says

 one corporate financier at a US investment bank.



 The telecoms giants hoped to avoid all this by

 raising cash from the sale of non-core businesses.

 But asset prices have crashed amid the realisation

 that last year's investment spree left Europe awash

 with telecommunications capacity. At the same time,

 analysts expect 3G to deliver smaller returns, and

 later, than previously thought.



 Mark Tinker, head of global debt and equity

 strategy at Commerzbank, says: "It's rather like

 buying a house on a credit card and then trying to

 sell the new family car to pay for it. Someone offers

 you £8,000 for a car when you reckon it's worth

 £20,000," he says. "But owing £30bn is not a problem

 per se. If the market regards a business plan as

 viable it will be happy to help a company

 restructure, but it will demand a price."



 So who will be next after BT to grasp the nettle?

 Analysts point to KPN, saddled with 22bn euros of

 debt, and France Telecom, which was forced to

 slash the float price of Orange in February, as

 among those most in need of issuing equity. Others,

 such as Deutsche Telekom, are constrained by

 government- held golden shares.



 There is only so much new paper investors can

 take. Fund managers typically devote a set

 weighting to the telecoms sector in their portfolio,

 never mind how many new shares flood the market.

 "The market should reward companies that go in

 early. If you get the finance, you are in a strong

 position. Companies that delay will find it a lot

 harder," said Mike Williams, telecoms analyst at

 Deutsche Bank.



 KPN has the lowest credit rating among Europe's

 former national phone companies; analysts say it

 would have to price a successful rights issue at a

 discount of as much as 60 per cent to its share price.



 Where does this leave the so-called alternative

 carriers, the small upstart telecoms networks? They

 too have been burning cash in the hope of carving

 a niche in 3G. Yesterday, Redstone Telecom, which

 floated in London in 1999, said it required fresh

 funds for the rollout of its broadband services. Mr

 Williams says if such companies find it hard to pull

 off rights issues this year, it will not be because of

 BT and the like have barged in ahead of them.

 "There is a very high degree of scepticism regarding

 the future of these companies," he says.



 The upstarts have one advantage over the former

 nationalised utilities ­ their more modest

 requirements means more scope for a rescue by

 speciality finance. So-called new technology

 convertibles, for example, have become hugely

 popular among alternative carriers in the US. They

 are bonds cost that almost nothing to service,

 convertible into shares in the future.



 "If you don't want to raise 15bn euros you have

 loads of options," says one corporate financier. "The

 US convertibles market is at its hottest in its

 history."



 Still shareholders in small and large telecoms firms

 are united in one respect: they can no longer expect

 the fat returns promised for these growth stocks this

 time last year.