Odd Telstra bond drops out

Reports emerged the week before last of an improbable bond issue by Telstra in the domestic market. The Financial Review had reported that Telstra was looking to sell A$500 million of ten-year bonds at a margin of 150 basis points over swap.

Telstra has not undertaken a similar issue since it raised A$500 million in November 2004. It has focused on international issuance since then and raised the equivalent of more than A$5 billion (at prevailing exchange rates). But it seems that offshore investors have become resistant to Telstra's overtures.

Last week came the news that the issue would not proceed. The issue was pulled for all the reasons that it was improbable:

• The pricing was way out of line with comparable issues and issuers in the secondary market.

• Telstra's A2 credit rating from Moody's is on review for possible downgrade, due to uncertainty over the implications of a full structural or operational separation of Telstra that the Australian government is now seeking to impose.

• Telstra has disappointed both debt and equity investors alike, in recent years. Institutional investors who have bought Telstra's bonds in the past, have had the pleasure of watching its credit rating slide from Aa2 at the end of the 1990s to A2 at the end of 2005.

• The direction of the long-term trend in Telstra's credit risk profile is clear.

• Telstra refused to allow investors a coupon step-up should its credit rating fall, nor would it consider a put option in the event of structural or operational separation occurring.
Was there ever going to be a bond issue or was this all in aid of making a (not so subtle) point - Telstra will struggle to raise debt while uncertainty remains about its future.

There is a certain urgency attached to this. Telstra's debt maturity profile, as revealed on its website, shows that it has A$1.5 billion of debt maturing this financial year and a further A$2.5 billion maturing next year. It also has A$3.0 billion maturing in each of the two years following.

If Telstra can no longer raise debt in either the domestic or international bond markets, it will be totally reliant on its bankers. They may not be too keen either, given the uncertainty that surrounds the telco and its diminishing credit quality.