Vultures close in on eircom

Eircom debt is insureable.

The risk factor in insuring it is indexed on the Itraxx index called the Itraxx Levx . While the culprit that spooked the index seems to be Portugal Telecom it will make the cost of hedging against an eircom default much higher.

ftalphaville.ft.com/blog/2007/07 … celerates/

OK Potted History.

The 2 largest heavy leverage operations in Australia are Macquarie and Babcock and Brown. They borrow in murky ways to get the fund to take over their targets and they then leve lots of bonds lying around in mysterious hedge funds.

Babcock have a subsidiary called BCM which owns eircom . It has no other asset .

Today it fell 3% in an otherwise stable market as you can see

markets.smh.com.au/apps/qt/quote … Go&submit=

Macquarie was (this week) the big story in Australia when one of their hedge funds collapsed.

chart.bigcharts.com/custom/ft2-c … &freq=15mi

mwprices.ft.com/custom/ft2-com/h … ompany=NEW

The interesting thing is what happened to eircoms ultimate owners, Babcock and Brown , at the same time as Macquarie

chart.bigcharts.com/custom/ft2-c … &freq=15mi

Something murky will soon be revealed there I feel !!

Itraxx series 7 crossover is worsening rapidly

eircom are a member as BCM Ireland ( see page 6 of this pdf)

markit.com/information/affil … ership.pdf

now look at bloomberg

bloomberg.com/apps/news?pid= … refer=home

Hmm. I don’t know what you could infer about Eircom in particular from the Xover s7 widening. I mean, the credit squeeze is occurring across the board - the Xover, the IG, the LevX indices are all wider. ABS, CMBS, RMBS all pricing wider in the primary and secondary market.

There is a broad based repricing of risk in progress.

Took a quick look at the XOver and BCMAU CDS spread history since start of june - correlation is 97.7%.

LFY

eircom are by far the most the most leveraged company in Ireland .

You are absolutely right about widening spreads everywhere LFY. It strikes me that the recent ‘share offer’ to the Irish government was eircom trying to get an implicit guarantee of solvency that would improve their credit ratings .

The problem right now is that the insurance cost ( thats what the itraxx actually measures) at €440k per €10m equivalent means that to hedge against an eircom default costs 4.4% when the bonds are paying LIBOR + 2 or 3 %…say 9%

The cost of insuring the same bonds was 1% as against 9% not so long back. The LIBOR has not moved much this year IIRC so maybe its 9.5% for accuracy.

All of this is independent of whether eircom are rerated downwards in future which would up their cost of servicing loans to maybe as much as LIBOR + 5% or even 7% …pure junk.

Currently they are ba3 on the bulk of their debt …mezzanine if I am right but not quite junk…yet .

The fact that the main eircom parent , BCM , fell 3% on friday and 3% again today on the australian stock market is also noteworthy.

It is underperforming the stock market over there. BCM owns nothing of note, bar eircom.

Of further note is that B and B and its sub funds are tracking Macquarie down in Australia of which

ftalphaville.ft.com/blog/2007/08 … rstand-it/

Well, the BCM reference bond for the Xover index is the E+500 note due in 08/2016. So that is paying Euribor + 500 and from looking at generic (as in - I can’t swear to them) prices on bloomie that is in or around par at the moment. So the cash is trading at +500 (ish) and the 10y CDS is at 540. So not a million miles away. Anyway, not sure why you are bringing in the cash market? CDS is a fine guage of credit quality.

Hmm. Eircom (or BCMAU anyway) are rated single B which is a good bit below investment grade - so they are already pure junk :slight_smile:

Mezzanine? Mezzanine describes the position of the debt in the capital structure rather than talking about its credit rating. Ie, mezz ranks junior to senior debt but is itself senior to the equity. Of course, that affects the rating, as the more junior the debt then the greater the loss given default. Still, not sure exactly what you are getting at…

But just brings us back to the repricing of risk we mentioned earlier. Babcock & Brown (and Macquarie of course) buy assets using debt rather than equity so debt becoming more expensive increases their costs and, all else being equal, reduces their profitablity. Thus the share price reduction is caused by (and certainly can’t be considered independent of) the credit squeeze. Ie, the share price doesn’t add much extra info in this case.

I suppose what I’m getting at is that though Eircom might have difficulty refinancing their debt when it comes due in a few years (if conditions are the same as now) for the moment they have good cash flow and can pay off the interest. Unless they have to refinance soon (and they might well I’m no expert on Eircom) then the gyrations in the credit markets are not going to be a huge issue for them.

LFY

Thank you for your expert eye LTY and your explanation of mezzanine …not an absolute but a relative in a series of tranches…I had assumed it was an absolute tied to ratings.

The fact that the bonds do not need to be (re)financed ( they wont be paid off) for a few years puts them in the clear until then so…thats unless there are covenants we do not know about .

eircoms parent down OVER 10% overnight on the Australian stock exchange .

asx.com.au/asx/research/Comp … p=NO#price

The parents own parent down 8.4%

asx.com.au/asx/research/Comp … p=NO#price

overall stock exchange down 2%

musings of B and B top dog Phil Green

abc.net.au/lateline/business … 999319.htm

But the market disagreed with that Phil . Over 10% down, shhheeesssh

2Pack wrote

This news should be good for the government in its current discussions with Eircom.

I guess that big Denis’ ears must also be pricking up at the pangs of B & B!

Down another 5% today although the Aussie exchange was only down 1.5%

See this chart
asx.com.au

Any ideas on where this will all end Mr 2Pack?

Hopefully in receivership so that the state can buy network/wholesale back cheaply and feck retail and the verminous staff who leveraged it with debt over the years to line their own pockets :smiley:

A lean efficient eircom wholesale with no more than 3000 staff would be good for the country if in public hands

We can start our reducing line rental to the EU average straight away and roll out BB everywhere…if we can offload the €4.2bn debt as a day to day issue.

Eircom deal delayed due to global crunch