10/07 02:01

London: Record Lending to Phone Companies Sparks Regulatory Scrutiny--Possible Risk to Worldwide Financial System Under Discussion

By Michael Rothschild

London, Oct. 7 (Bloomberg) -- Banks are making almost half their loans in Europe to telephone, media and computer companies, sparking concern among regulators that lenders are over-extended.

Deutsche Telekom AG and United Pan-Europe Communications NV are among telecommunication companies that asked banks for a record $252 billion in the first nine months, according to Thomson Financial Securities Data. That's up from $38 billion, or 17 percent of all loans, during the same period two years ago.

Regulators are discussing whether there is a risk to the world's financial system that banks have bet too heavily on technology companies. They could put a brake on lending, crimping the ability of phone companies to fund the $500 billion needed for acquisitions, to buy mobile licenses and to build networks.

``Financial institutions need to be certain they are aware of common risks,'' said Svein Andresen, head of the secretariat of the Financial Stability Forum, a group that includes finance ministers, central bank governors and regulators from 11 countries.

Members of FSF, gathering last month in Basel, Switzerland for their regular semi-annual meeting, decided that ``risk concentration'' needs to be assessed in greater detail by regulators and supervisors, he said.

``Even if they don't do anything, the fact that regulators are looking at this issue will be factored into bank's willingness to lend,'' said Faith Bartlett, a loan analyst at Fitch Plc in London. FSA Review

The U.K.'s Financial Services Authority, which holds sway over banks in London -- including Citigroup, the No. 1 lender to European phone companies -- has ``embarked on some much more rigorous analysis of those exposures,'' said Chairman Howard Davies, while in Prague during the annual meeting of the World Bank.

An FSA spokeswoman stressed that the U.K. review is internal so far and that it isn't simply the big numbers that regulators look at but how banks deal with their loans.

``The job of the regulators is to make sure risks are identified and managed properly,' said Kate Burns, an FSA spokeswoman.

Banks reduce their risk by selling bits of loans to other lenders in secondary trades. They also buy derivative products like credit default swaps, which act as insurance policies.

``The numbers are very inflated,'' said Ken Goldsbrough, a managing director at Barclays Capital in London. When Barclays Bank Plc, which is the second-most active arranger of loans to European companies, extends a credit, the asset is actively managed through derivatives, selling bonds backed by the loans and straight secondary market sales, he said.

`A' Rated Borrowers

What's more, two-thirds of the loans made to phone companies this year are to the least risky borrowers -- those with ratings at or above ``A'' according to Thomson.

The bulk of loans, 69 percent, have a maturity of less than one year, meaning banks don't have to set aside capital for the credits until they are used. Short-term loans tend to be repaid quickly by bond or share sales.

When Telecom Italia SpA announced it was taking out a loan in July, the company also said it planned to sell bonds that could be used to repay the credit. The company asked banks for 10 billion euros and increased the size of the loan to 13 billion euros on strong demand from lenders expecting to be quickly repaid.

Investment-grade phone companies are finding ready takers for their bonds now -- Telefonica SA boosted a bond sale by $1 billion to about $6 billion when it sold securities last month. It's the estimated $150 billion of short-term loans arranged so far this year that need to be refinanced over coming months that are spooking some analysts.

``No market is capable of taking that kind of pressure,'' said Jeroen van den Broek, a bond analyst at ABN Amro Holding NV in Amsterdam.

If even a quarter of this amount is sold to bond investors in Europe, borrowing costs would shoot up, he said.

Yield Spread Doubled

Phone companies are already paying up for their debt. The yield spread on France Telecom SA's euro-denominated bonds maturing in 2008 have doubled from the start of the year to about 90 basis points more than government securities of a similar maturity.

France Telecom, which is planning to sell at least $5 billion of bonds to help pay for German high-speed mobile phone licenses, had its long-term debt credit rating reduced two notches to ``A'' by Standard & Poor's Corp. in August and to ``A1'' by Moody's Investors Service last month.

Deutsche Telekom, which Oct. 2 signed an agreement with banks to borrow 12 billion euros -- its first-ever loan -- was downgraded three notches to ``A-'' by S&P and to ``A2'' by Moody's.

Telekom Savings

The new ratings save Deutsche Telekom from paying more interest on $14.5 billion of debt it sold in June. The debt, the largest corporate bond sale, requires Germany's biggest phone company to boost coupon payments by 50 basis points if both S&P and Moody's ratings drop below the single-A category. That would have cost it about $72.5 million a year.

Companies with junk ratings stand to find it toughest to raise money, said Fitch's Bartlett. ``The impact will be greatest on the riskier companies,'' she said.

Chase Manhattan Corp. and TD Securities have been selling portions of a 4 billion-euro credit for UPC for months.

They increased the interest margin on part of the loan by as much as half a point after lenders balked at providing funds, people familiar with the transaction said last month.

UPC is rated ``B+'' by S&P -- three rungs below investment grade. Moody's ranks the company one notch lower at ``B2.''

Almost two-thirds of European high-yield bonds have been sold by telecom start-ups and these companies have a high likelihood of default, Bartlett said.

If investors shun companies that sell junk bonds, more highly rated issuers could suffer by association.

``The whole telecoms sector is intertwined. You could have a domino effect,'' she said.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial%20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=blk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOd68ORZ.UmVjb3Jk

-- Carl Jenkins (Somewherepress@aol.com), October 07, 2000

Answers

Banks in Europe are making half their loans to the telecoms? That's an amazing figure. I wonder what the percentage is in the U.S. Similar, I'd bet.

-- Uncle Fred (dogboy45@bigfoot.com), October 07, 2000.

It seems to me that kind of lending is all out of balance.

-- Loner (loner@bigfoot.cm), October 07, 2000.

Does this mean that the mutual funds in this country would be in danger?

-- LillyLP (lillyLP@aol.com), October 07, 2000.

I would think that everything would be in danger with this kind of disproportionate lending. I had long thought that the spark that would set off a world wide stock market collapse would start in Japan. Now, with the recent European riots, the slump in the euro, the ill-adivsed bumping upward of interest rates, and such, it's looking like the world's big financial problems will start in Europe.

-- Wellesley (wellesley@freport.net), October 07, 2000.

Without increasing interest rates, how could they fund the US debt?

-- David Williams (DAVIDWILL@prodigy.net), October 08, 2000.