NEW YORK-The number of licenses awarded, not the prices paid for them, likely will lead Standard & Poor’s Corp. to downgrade the debt ratings of many winning bidders in Germany’s recent third-generation wireless auctions.
“The total paid, 50.5 billion euros ($45.85 billion), conforms to our expectations, but we were surprised that six instead of five licenses were awarded,” said Duncan Warwick-Champion, the London-based head of S&P’s European corporate ratings team.
“Six instead of five means competition will become more fierce in the German market than we expected.”
Warwick-Champion led a conference call Aug. 21 that S&P held to fulfill its obligation to advise the investment community about the direction it believes its ratings will go. The lower a company’s ratings are from agencies like Standard & Poor’s and Moody’s Investors Service Inc., the higher the interest rates that company must pay to attract bondholder investments.
“We are generally more negative on UMTS (Universal Mobile Telecommunications System) than the equity analysts,” he said.
An array of concerns about the German UMTS results will come into play as S&P deliberates during the next several weeks about the ratings of British Telecommunications plc, Deutsche Telekom AG, France Telecom, Koninklijke KPN N.V., Sonera Corp., Telefonica and Vodafone AirTouch plc.
In a highly competitive environment, carriers may be tempted or forced to lower consumer prices in order to add subscribers quickly. At the same time, they may incur above-normal subscriber acquisition costs. Consequently, declining profit margins are a distinct possibility.
“Generally, we view debt financing to be negative, and we expect large capital expenditures for network construction and service deployment,” Warwick-Champion said.
“There is demand uncertainty and the question of how to get revenues, how to capture all the value. Infrastructure, handset and applications providers could reap much of the benefits.”
The debt ratings of British Telecom, which backed winning bidder Viag Interkom, could be lowered a notch or two to the mid-to-low A range, he said. S&P lowered its long-term rating on BT to A-1 from A-1-plus Aug. 24.
Standard & Poor’s is generally supportive of BT’s attempts to diversify its portfolio beyond its “strong domestic base in the United Kingdom,” where regulatory and competitive pressures are growing. However, the rating agency is concerned about the increasing leverage, the rising ratio of debt to equity that the operator is experiencing as it bids in various third-generation wireless auctions.
“We will look at the assets at BT’s disposal for rebuilding its balance sheet. S&P will discuss with BT what can be done,” Warwick-Champion said.
“We can accept timing delays of asset disposal, given the current environment, but three-to-four years is not acceptable.”
As the dominant telecommunications carrier in Germany, Deutsche Telekom possesses fundamental strength, he said. However, its S&P rating is likely to drop slightly to A- due to two primary concerns. First, unbundling of the local loop has led to more competition and dramatic price declines in DT’s domestic wireline business. In addition, the carrier’s participation and exposure is increasing in Eastern Europe and in start-up ventures in Western Europe.
Like DT, KPN of the Netherlands is experiencing “intensified pressure in its fixed-line domestic operations,” said Peter Kernan, another London-based corporate ratings analyst for S&P.
KPN Mobile and Hong Kong-based Hutchison Whampoa were part of the E-Plus-Hutchison consortium. However, Hutchison withdrew “because its business plan was predicated on three licenses total, not just one each,” he said.
“With one each, they are capacity constrained, and this weakens their competitive position.”
Going into the German UMTS auction, the Dutch telecommunications operator already had become deeply involved domestically in developing mobile Internet and Internet Protocol.
“KPN has made a substantial investment with heavy upfront costs in an immature business that has substantial potential, but there also is substantial uncertainty around mobile data and Internet services,” Kernan said.
As for Spain’s Telefonica, a majority participant in the 3G Group consortium, Standard & Poor’s has affirmed its A+ rating but changed the ratings outlook to negative from stable.
To maintain its current leverage and debt ratings, Telefonica must be able to finance all of its 3G license payments out of a planned initial public offering of its global mobile business, said Louis Landeman, a Stockholm-based corporate ratings analyst for S&P. Telefonica plans to bid for next-generation wireless licenses in Italy, France and several other countries in Central and Northern Europe, he noted.
The A+ rating of Finland’s Sonera, minority stakeholder in the 3G Group, is on CreditWatch with negative implications, Landeman said. This outlook is directly related to Sonera’s participation in the German UMTS auctions.
“However, S&P also recognizes that its VoiceStream interest potentially will be sold to finance the German 3G license. Sonera also used $690 million received from the IPO of Powertel, in which it still is a 37-percent owner,” he said.
France Telecom, which backed MobilCom in the German bidding, saw its S&P rating drop to A from AA- after its acquisition of Orange plc.
“France Telecom is expected to dispose of its ownership in Sprint (Corp.) and Deutsche Telekom and its minority shares in other mobile businesses in 2001,” Landeman said.
“If it uses debt to buy a 3G license in France, that would likely result in a further ratings downgrade.”
Once Vodafone completes its sale of Orange to France Telecom, the rating agency expects to raise the British carrier’s ratings to either A- with positive implications or to A, Landeman said.
Standard & Poor’s had expected Vodafone or Deutsche Telekom to get three of the German 3G licenses up for grabs, given that they have “lower spectrum reserves than Viag Interkom or E-Plus,” he said. However, Vodafone’s balance sheet leverage has not increased as the result of its participation in the German auctions.
“Overall, this has been positive for Vodafone’s credit rating,” Landeman said.
