PCCW, Telstra settle Reach debt
Undersea cable partners pay just US$311m after lenders accept US$889m haircut
PCCW and Australian partner Telstra Corp have agreed to settle US$1.2 billion in loans to their undersea cable joint venture for just $311 million, which should put the operation on a firmer financial footing.
Reach lenders, including HSBC, ANZ Bank and Barclays, will receive 25.9 cents for each dollar of loans, which means an US$889 million haircut for them.
PCCW and Telstra have also arranged a US$50 million revolving loan facility for Reach, giving the company sufficient working capital to keep operating.
The threat that Reach could be liquidated after failing to make interest payments forced PCCW and Telstra into action. The interest payments amounted to US$82 million a year, easily devouring the company's operating profit.
Citigroup Smith Barney estimated Reach's operating profit at US$95 million this year and $77 million next year.
'If the parents didn't buy the Reach loans, cash flow from operations would not be enough to meet the interest payment obligations,' a source involved in the deal said.
After settling the debt and receiving the new loan facility, PCCW and Telstra should not be required to inject additional cash into the operation, the source said.
The two partners will equally share the US$311 million payment.
Analysts did not expect the bailout to have much impact on PCCW's finances. However, some believed the deal would delay its debt repayment schedule and a plan to start paying dividends.
'It's not that they don't have the money. They do have the money,' BNP Paribas Peregrine regional telecommunications research director Voon San Lai said.
He said PCCW should be paying down its own US$4.3 billion debt first. 'It's about how they are to go about allocating resources. For PCCW, their priority is to pay down their debt, especially with interest rates rising.'
Reach, set up three years ago, is the largest carrier of international voice, business data and internet traffic in Asia, but it has struggled due to overcapacity in the industry. The equal joint venture borrowed US$1.5 billion from banks.
Last year, the lenders agreed to restructure the loans in return for an immediate repayment of US$300 million.
With the previous payment, Reach lenders have recovered 40 per cent of the loans plus interest.
'The settlement, when combined with payment received last year, represents a reasonable outcome for the lenders, particularly when compared with other restructurings in the industry,' the banks said in a joint statement. Other lenders include Credit Suisse First Boston, JP Morgan, UBS and Fortis Sanwa.
Some analysts said PCCW and Telstra were 'too generous', considering Pacific Crossing paid back just 4.6 per cent of its loans and Asia Global Crossing, 22 per cent.
Excess capacity and tough market conditions have forced other undersea cable carriers into bankruptcy or to dispose of assets at fire-sale prices.
Bill Barney, the president and chief operating officer at Asia Netcom, told Bloomberg that Asian broadband prices had plunged as much as 90 per cent over the past two years, although the bottom was expected to be reached next year.