Europe: Probe into telecom bank loans--Regulators fear banks have lent too much

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Europe: Probe into telecom bank loans--Regulators fear banks have lent too much

By James Mackintosh, Aline van Duyn and Dan Roberts

Published: September 28 2000 19:55GMT | Last Updated: September 29 2000 09:52GMT

European banking regulators are probing $171bn (E194bn) of new loans made to European telecommunications groups, fearing that the banks have lent too much money to the sector.

The worries - sparked by loans to fund the cost of third generation mobile phone licences in Europe - were discussed at a meeting of international financial regulators two weeks ago. Several European banking regulators have since launched inquiries and are now questioning the banks they oversee.

Sir Howard Davies, chairman of the UK's Financial Services Authority, this week described the level of lending by European and US banks as "a matter of great concern to regulators" because of the risks the banks are taking with one sector.

Regulators elsewhere in Europe went further, likening the concentration of debt to the run-up to the 1992 property crash and the 1998 hedge fund crisis, both of which caused major problems for banks.

Regulators have traditionally taken a tough line with banks when they become over-exposed to one sector. They fear that if the telcoms sector is hit by unexpected financial problems, the extent of the banks' lending could cause wider difficulties.

The banks which have arranged the most loans to the telecom sector this year are Citigroup, Chase Manhattan, Morgan Stanley Dean Witter, Barclays and HSBC, according to data from Capital Loanware, the data provider. Although not an exact measure of exposure because loans are sold on or refinanced, it indicates the most active players.

Almost 30 per cent of this year's international syndicated loan market - where the largest loans were arranged - was taken up by telecom debt. In Europe it was above 40 per cent.

The watchdogs' inquiries could result in warnings to the most exposed banks to cut back lending to telecoms companies, further increasing their cost of borrowing.

Raising new money has already become more costly for telecoms groups, after cuts in credit ratings led to higher interest rates on their bonds.

Telecoms companies in Europe are particularly worried about any clamp down on new borrowing. They need well over E100bn more in order to fund the estimated extra E160bn cost of building networks to run third generation mobile services.

"This [probing by regulators] could be a disaster," said one UK telecom executive.

A senior UK banker said: "It is our responsibility to make crystal clear that we know our exposures and we understand the risks". He added: "The [watchdogs'] concern is legitimate but any systemic risk [to the financial system] would come from outside chances such as the 3G network just being completed when boom, fourth generation arrives."

But bankers are now having to explain to their regulators exactly how they are controlling the risks, in what Sir Howard called "much more rigorous analysis of those exposures".

He told a seminar in Prague this week: "Financial sector exposures to the telecommunications industry . . . is a matter of great concern to regulators, certainly across Europe."

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Europe: Confidence in telecoms is far from buzzing

Operators' shares are on the slide. Dan Roberts and Aline van Duyn report.

Published: September 29 2000 09:33GMT | Last Updated: September 29 2000 09:38GMT

Only last February, telecoms companies could do no wrong. Now they can do no right.

The share prices of the largest European operators have fallen by about a fifth as investor confidence has evaporated as fast as it arrived.

Some of the largest, such as Deutsche Telekom, have seen their stock market value more than halve.

But what worries the industry most about the latest sign of nervousness from banking regulators over debt levels is that it could trigger a vicious circle.

The initial reason for their problems was the cost of bidding for third generation mobile licences in Europe which was several orders of magnitude higher than expected.

Once the remaining licences in France and Italy are allocated, analysts at ABN Amro expect the total licence cost in Europe to reach E160bn.

The cost of building the networks will add another E100bn at least.

This has put enormous pressure on the balance sheets of former state-owned utilities whose debt was once regarded as one of the safest investments around.

Their attempts to raise cash by selling unwanted assets is hampered by the fact that everyone else wants to sell at the same time.

To make matters worse, prospects for the underlying industry also look far bleaker than during the heady days before the mobile auctions.

Technology shares fell for the third day in a row yesterday with telecoms manufacturers suffering the latest collapse in confidence as rumours of imminent profit warnings abound.

Marconi shares were worst hit, falling nearly 10 per cent, before recovering slightly to close down 65p at 922p, but both sides of the Atlantic have been hit equally hard.

The regulators' concerns about telecoms reflect those of investors.

The consequence of the extra leverage taken on by the telecoms companies, such as British Telecom, Deutsche Telekom, France Telecom and KPN, has been a cut in their credit ratings, in most cases from the "double A" to the "single A" category.

Although this is still a relatively high rating and above investment grade, the rating downgrades have resulted in a higher cost of borrowing.

The rating agencies have also made it clear that companies need to focus on reducing their debt levels, and this has shifted attention to equity markets.

Most large telecoms operators have plans for a partial flotation of at least one of their main divisions to raise extra cash.

KPN, BT, Telefonica, France Telecom and Deutsche Telekom would all like to list their mobile phone operations if possible, although investment bankers warn the window for such issues is closing rapidly.

Nevertheless, the rating agencies have made clear that companies need to reduce their debts if they want to avoid further ratings cuts.

"The telecoms companies need to work on reducing debt through equity issuance or the sale of assets," said Chris Legg, director of corporate ratings at Standard & Poor's, the rating agency.

"Some still have negative outlooks and if there are difficulties or delays in reducing debt, their ratings could be cut further."

Most analysts estimate that the companies have a six to 12-month window in which to achieve reduced debt before both the rating agencies, and banks, start to worry.

"If telecoms companies have problems raising funds in the equity or bond markets, some of the 364-day loan facilities may well have to be rolled over rather than repaid," said Richard Munn, managing director of loan syndications at Deutsche Bank.

In the bond markets, investors are buying new bonds, even if the companies need to pay a premium. KPN, for example, this week raised $4.4bn in the bond markets and is planning an equity transaction in the coming months.

The need to actually reduce debt, whether long-or short-term, means sentiment in the equity market is more important.

The size of loans available to telecoms companies has increased to record amounts, and banks are willing to commit more capital to providing the interim financing needed.

Banks said regulators had asked them about this because it was also a new phenomenon for the regulators. Such large amounts of lending can only continue if the proceeds can be refinanced quickly.

"The large, short-term loans we have seen in the market are dependent on positive sentiment remaining in the bond and equity markets," said Ronald de Leeuw, head of loan syndication at ABN Amro. "Each bank has to decide for itself which clients and for which amounts it wants to take on these risks."

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-- Carl Jenkins (Somewherepress@aol.com), September 29, 2000


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