BT Deal On Again

British Telecommunications is again trying to borrow billions in the bond market. But it has been forced to sweeten the pot this time.
Ed ZwirnNovember 17, 2000

British Telecommunications will issue $6 billion-to-$8 billion of global bonds in the coming weeks, a source at one of the lead underwriters confirmed.

The issue, which is driven by the firm’s need for cash to pay for its mobile phone licenses in the United Kingdom, will be led by Merrill Lynch, Salomon Smith Barney, and Morgan Stanley Dean Witter.

BT has been experiencing difficulty in its attempt to borrow since August, when Standard & Poor’s, concerned over the cost of European mobile licenses, downgraded it along with other European telecom issuers.

While investors in all of the affected firms were cautioned that their ratings would fall to the lower end of the ‘A’ category, a particularly heavy hammer fell on BT in the announcement at that time: If the firm becomes “unable to generate sufficient near- term cash from external sources, it is conceivable that BT’s long-term rating could fall below ‘A’.”

While BT was eventually spared the ignominy of falling below that magic mark, the adverse publicity effectively derailed a $10 billion issue BT had already announced at that point.

The issue was subsequently put off, first due to a crowded calendar (Spain’s Telefonica came out with a dollar/euro deal worth nearly $5 billion shortly after Labor Day), and later by BT’s strategic alliance or merger talks with AT&T.

Now that the calendar has cleared and the AT&T talks are off, BT has set about resurrecting the bond deal.

But it has been forced to make some changes to the original package.

For one thing, it has added another lead underwriter in the form of Morgan Stanley Dean Witter.

Also, it is adding a “step-up” coupon provision to insulate investors from possible future downgrades.

Under this provision, the bonds, which at this point will probably consist of five-, 10 and 30-year dollar tranches, will increase in coupon 25 basis points for each ratings notch when they fall below A3/A-, which is the lowest level S&P and Moody’s Investors Service give in the “A” area.

The provision would require BT to increase the interest rate by 25 basis points for each downgrade per rating service. So, for example, if both S&P and Moody’s each downgrade the bonds one notch, BT must increase the interest rate by 50 basis points.

Sources at the lead underwriters say it is too early to gauge demand for the deal, which was announced Friday morning.

The European segment of the road show will begin next week and it will be shown to investors in the United States the week after Thanksgiving.

Pricing is expected either the week of Nov. 27 or the week of Dec. 4.