'Belgacom Case Study\r'

'Belgacom Case interrogative sentence 1 a) Why did the character monetary observe of Belgacom increment following the declaration of the learnedness? b) Why did the judges of Belgacom drop (S&type A;P) or cat on oppose delay ( tenacious’s)? a) As Belgacom secured the purchase of the re master(prenominal)ing 25% sh be of Proximus it did not own simply, the sh are harm of the Belgian conjunction shift magnitude by 0. 92 % the alike(p) day and 9. 8% oer the following month. An announcement basis lead to pre- pillow cheek abnormal returns as commercializes react to this information to construct a aid.Investors testament try to assess the sum up in expected earnings and dividends. The fix of this assessment leave depend on how the merger is done, how the transaction is paid, the sector it concerns, and so on However, accord to mart efficiency theories, overreaction on stock prices tend to disappear in the long-run and the price reflects the present mens u pass judgment of expected returns. (FAMA, 1998) That beness said, several(prenominal) reasons whitethorn explain this jump.First, we screw underline the situation that this operation enables Belgacom to collect all the benefits of Proximus. earlier the purchase, 25% of the earnings of Proximus were placed in minority worrys, these were settleable to Vodafone. subsequently the operation, Belgacom owns blow% of the shares and can enter all the funds of its subsidiary in its accounts. It represents an increase of the proximo silver in flow not simply if for the firm just also for its modern shareholders, which will be repo butt againstd to match much than in the in store(predicate) or that their shares represent much cash in.This is due to the close of Belgacom to pay its encyclopaedism by debt which doesn’t give ownership rights to the get owners. Fig. 1: Evolution of Belgacom Share scathe ( two hundred5-2008) bit, Belgacom was long-familiar w ith Proximus note as Belgacom (75%) founded the caller-up with Airtouch (25%) in 1994, creating by this way the initiative spry phone operator in Belgium. b) remote the commercialise, valuation agencies did not welcome positively this transaction: Moody’s changed its arithmetic immoral to negative and advantageously-worn&Poors rankd Belgacom place to A from A+. Moody’s xplained that it keeps Belgacom’s rank unchanged because according its methodology designed for GRI (Government-Related subjects), t present is no change in Belgacom solvability. Moody’s GRI methodology use three inputs: the rating and the outlook of Belgium, the low level of fail dependence and the medium level of guard from the Belgian government. While there is no change in those inputs, there should be no change in Belgacom rating. That being said, several indicators lead the agency to extol near the ability of the Belgian troupe to deal with its identification ors.First, Belgacom announced a clustering of outflows for the months to come: just at the same(p) sequence, Belgacom decided to merchandise its 5,8% s mob in Neuf Cegestel to SFR: the outcome of the operation was EUR 187 one million million million summation a share defile rear end (maximum 200 million) and a dividend in 2006 for EUR 100 million. Futher more, Belgacom decisiveness to use its current monetary constancy and therefore weaken its debt ratios. As for Standard&Poors, the agency decided to place the rating of the Belgian firm from A+ to A.S&P said this last lies on the detail that the Belgacom debt will mug up of about EUR 2 billion, making notably increase the debt/Ebitda ratio from 0,8 to 1,9. Moreover, its business in a competitive and liberalized market, as well as the decline of quick-frozen lines market guide fear for future results of the play along. However, the outlook re of imports s slacken, that can be explained by the fond blot of t he association on the Belgian telecommunication market and its gigantic ability to generate cash. headland 2 a) Why was the acquisition financed by a dyad bring? ) What were the secondary reinforcement sources? a) Bridge brings are hornswoggle-term fiscal instruments ordinarily employ to lock-in a settled price( (frequent in Real E sumuce Market). This recitation buys time for the deal maker to come apart things out and to split up structure its finance scheme. This seems to be the main rationale for Belgacom in this bring out. The management wanted to lock-in the price hold on with Vodafone and as the deal was subordinated to the Belgian Authorities approval, it was more cautious to make it happen right away. heretofore there is some(prenominal) other way to see a keep going loan as a unstable pricy loan serving the usage of being an intermediate financing mean for the follow that benefits from it (Fabozzi, 1991). Later on, this distich loan is reimbu rsed with more advantageous types of loans. was in detail a syndicated loan underwritten in entrap to finance an acquisition. As a count of incidents, the loan was made by several lending institutions called the mandated lead arrangers i. In the get laid of Belgacom, the company took a bridge loan for several reasons that are detailed below.The bridge loan e. BNP Paribas, Citi, Fortis, ING and JP Morgan. For the enthronization cambers that underwrite the syndicated loan, the main interest resides in the fact that they secure a fee. In this specific trip, the bridge loan was arranged as a revolving reference point instrument type. This meant Belgacom had to pay a fee plus interest expenses and can draw-repay-redraw as many times as trained. As said before, a premiere valid reason would be that the cash was needed quickly ( maybe) and bridge loans are arranged more quickly.In any case it is in the go around interest of the company (Belgacom here) to reimburse the bri dge loan as quickly as possible because it is very(prenominal) expensive and the interest rate by and large increases with the maturity. Moreover issue unified impounds takes time. In fact, there are four main steps to issue a vex in the cling market. First, there is the pre-mandate phase angle which aims to determine the patronage needs or whether it is the right time to tap the draw market. Additionally, the currency has to be determined, the market as well plus the conducted investors.After that, comes the volume construct bear upon which is one of the most chief(prenominal) tasks that consists of taking the ordains from the investors. Then, a range for the voucher rate has to be determined and the essences get to be allocated to the investors. Those steps could typically take weeks. Helping companies with short term funding is thus a major need for the client. Another reason may be that it gives Belgacom time to wait for more friendly economic conditions for issuing the hampers. Depending on investor’s appetite, timing is in fact of import in such(prenominal)(prenominal) deals.Now, from the enthronization cashbox’s perspective, there is possibly a conflict of interest as the investment bank is at the same time creed ratingor (through the bridge loan) and the entity that prices the securities that will be utilise to reimburse this loan. One could argue the investment bank could lack objectivity (Glazer, 1989). However, this constitutes an spare incentive for the book runners to successfully buy in the deal to its end. Additionally, four of the quintet banks that give the bridge loan became the joint book runners. To that extent, there are clearly business interests which are involved.This can be provoke for the investment bank in order to get closer to the client. Moreover, this form of short term financing is more expensive for the company because it bears high luckinesss. Alternatively, it means that it is more lucrative for the investment bank as well. To sum up, bridge loans seem to be a lucrative source of clams for investment banks. First, they place themselves in a comfortable position to issue constipates for the company later on. Second, they can diversify their tax revenues and be a good candidate for the bond takings.As a matter of facts, four of the five banks providing the bridge loan took care of bond issuance. b) Alternatives to bridge loans were traditionally letters of comfort written by the investment bank stating that the bank was ‘highly confident’ that the spare financing needed by the company could be attained. This implies no bridge funding at all. Hence the alternative would be to wait for the bonds to be issued. The put on the line here however would consist of being too late for acquiring the target. Another alternative would be to use your own swell to fund the acquisition in the short run.This depends, of course, on the ability of Belg acom to generate such a large metre of cash. Yet another option would devote been to shake more capital by issuing shares with the symmetry of its existing shareholders. However, this option could sire been detrimental to existing shareholders: the Belgian conjure which had a major stake in Belgacom with 50. 1% of the shares. Here is a succinct of all the plausible alternatives: * Pay with retain cash: Belgacom could put 2Bn€ on the table for Vodafone’s stake (assuming that the amount was obtainable at the time).Although, this is known as the pound case scenario for current shareholders. Putting the cash in an acquisition would also pull in constrained Belgacom to lower (even cancel) its expansion investments. * Go straight to the Market: Belgacom could issue the bonds without taking the bridge loan but since the company had no prior bonds outstanding in the secondary market, the set would have been requisite anyway and it takes time and money to process it . The risk in that case is the agreement with Vodafone; other players could profit from the info and buy the stake in order to sell it back to Belgacom at a allowance. point 3 Assuming the 5- course of instruction merchandise rate was 3. 922% and the 10-year swap rate was 3. 977% at the time of pricing the deal (primary market), could you calculate: a) The support for investors The consent to is composed of the risk-free interest rate and the risk premium. The risk-free rate is usually defined as the rate of a government bond or the interbank rank (ex: Euribor) for the same maturity. However, the swap rate is used for maturities beyond 12 months. Here, the instructive teaching assumes that the 5-year and the 10-year swap rate were one by one 3,922% and 3,977%.The credit dust or risk premium depends on the maturity and the quality of the issuer. After comparing the coupon offered by companies with the same risk profile from the telecom mate meeting in the secondary market , the explanatory note explains banks’ position which suggested to issue the 5Y bond and the 10 Y bond with a blossom out guidance of respectively 30-35 bp and 60-65 bp. Bonds 5 and 10 geezerhood| Years to| 2006| | | maturity date| 5 old age| 10 years| | | interchange Rate (rf)| 3,92%| 3,98%| | | | Min| ooze| Min| gunk| | | Risk subsidy| 0,30%| 0,35%| 0,60%| 0,65%| | | impertinence Value| € -100,00| € -100,00| € -100,00| € -100,00| | | wages to due date| 4,222%| 4,272%| 4,577%| 4,627%| | | voucher Rate| 4,125%| 4,250%| 4,ergocalciferol%| 4,625%| | | equal €| € 99,57| € 99,90| € 99,39| € 99,98| | | Price %| 99,57%| 99,90%| 99,39%| 99,98%| | | Fees| 0,15%| 0,15%| 0,25%| 0,25%| | | Proceeds| 99,42%| 99,75%| 99,14%| 99,73%| | | Cost %| 4,256%| 4,306%| 4,609%| 4,659%| | | Table 1: Results for the Bond Issuance Thus, the hold for investors should be the sum of the risk-free and the risk premium rate: * Min. 4,222% an d max. 4,272% for the 5-year bond * Min. 4,577% and max. 4,627% for the 10-year bond ) The coupon rate The coupon rate is the amount of interest payable on the bond. It is fundamental to keep in mind that the market practices want the yield to vary by steps of 0,125%. Therefore, according to table 1, the yield for the investor varies between 4,125 and 4,250 for a 5-year maturity bond and 4,5% and 4,625% for a 10-year maturity bond. c) The issue price The issue price is the price at which investors buy the bonds in the primary market. The bond issue price is the present measure of the bond’s cash flow. To obtain this price, we have to use the coupon rate, the formulation value and the yield for investor as draw in this formula:Issue Price = Coupon 1(1+y)+ Coupon 2(1+y)? +… +Coupon n1+yn+ Face value1+yn At issuance, the subscriber will pay: * Min. 99,57%, Max 99,90% for a maturity of 5-year * Min. 99,39%, Max 99,98% for a maturity of 10-year d) The cost for Belgacom T he cost to maturity for the issuer y is defined as: Issue Price †Fees of the bookrunners = Coupon 1(1+y)+ Coupon 2(1+y)? +… +Coupon n1+yn+ Face value1+yn The rate y solving (cost to maturity) this equation is: * Min. 4,256%, Max 4,306% for a maturity of 5-year * Min. 4,609%, Max 4,659% for a maturity of 10-year e) Cash Flows Here are the cash flows for the issuer. For a maturity of 5 years: At inception (time 0), the issuer receives (99,57%-0,15%)=99,42% multiplied by the broad(a) face value. Every year for 5 years, the issuer pays the coupons of 4,125% * face value of the bonds At maturity, the issuer has to repay the whole face value plus the last coupon. | | | | | | | | | | | | Cash Flows as % of Face Value| 5y-Bond| 0| 1| 2| 3| 4| 5| | | | | | Bottom| 99,42| -4,125| -4,125| -4,125| -4,125| -104,125| | | | | | Up| 99,75| -4,25| -4,25| -4,25| -4,25| -104,25| | | | | | | | | | | | | | | | | | 10y-Bond| 0| 1| 2| 3| 4| 5| 6| 7| 8| 9| 10|Bottom| 99,14| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -4,50| -104,50| Up| 99,73| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -4,63| -104,63| | | | | | | | | | | | | Question 4 Consider an outstanding corporate bond in the secondary market (issued a few months ago). completely else being equal, the market suddenly perceives a more important credit risk associated with the considered issuer. What shock should it have on: a) The credit shell out The credit risk is the risk that the issuer may oversight and not pay back the full amount he owes to bondholders (the total face value of the bonds).The credit give out translates the uncertainty about potential future stock price movements”. (Berk, 2011) If the market suddenly perceives more important credit risk associated with the issuer, the credit spread will broaden as the market is perceived has being relatively guardr. The payoff associated to extra credit risk is a higher yield. Therefore, the credit spread represents a bonus f or investors when documentation extra risks. Fig 2: Yield curves Source: CFA b) The yield There are two components in the yield: the risk free rate and the credit spread. All else being equal, if the credit spread widens, the yield increases. ) The price Investors want to pay little for a risky bond having the same pay-offs as a risk-free bond. By taking more risk, the final amount the investor expects to receive may be less(prenominal) than what he will get as there is a credit default risk. (Berk et al. , 2011) The variable on which the market has a direct influence on in order to adjust for a higher yield is the market price. Due to the negative relation between the yield and the price and if the coupon payments and the principal repayment quell unchanged, the price must decrease in order to translate the surge in the yield.This is particularly relevant when the issuer is the target of a leveraged buyout, which, in most cases, is leveraged by the issuance of new bonds. The inc rease debt used in order to make such financial actions often decrease the totality of the bonds of the issuer to a status of « junk bonds ». Question 5 How would you assess Belgacom’s position with examine to the qualitative factors enumerated to assess the pricing ? * Issue premia for recent transaction First of all, this is the first bond offering issued by Belgacom.Therefore, it cannot be referred to a previous premium offered in its own recent transactions. Therefore, the reference will be the telecom equal group having the same risk profile. * After market performance of recently launched deals The issue premia have widened for two main reasons. First, a burn towards more acquisition in the telecommunication sector since 2005. Second, the Telecom sector suffers from the fact its services are more and more commoditized which in turn may put up the profitability of a Telecom company. At the time it was expected the bond could be split in three types.A pla nless rate note and two fixed rate notes. It was expected the 3-year FRN had a spread of 15bp to 20bp whereas the fixed 5-year note would have a 30bp to 35bp spread. Finally the 10-year note would have had a spread of 60bp to 65bp. With regards to recent transactions, Deutsche Telekom was offered a spread of 20bp for a 3-year floating note. 15-20bp is thus potentially better for Belgacom. As far as the fixed notes are concerned, Belgacom seems to benefit for a slightly better spread for 10-year notes but not for the 5-year ones as the one of Deutsche Telekom was only of 17bp in April 2006. Date| Swap 5-y| Swap 10-y| Coupon| Spread(bp)| Currency| Amount| Deutsche T| April 2006| 3. 83%| | 4%| 17| EUR| 750m| Deutsche T| May 2006| | 4. 13%| 4. 75%| 62| EUR| 500m| Telefonica| Feb 2006| 3. 42%| | 3. 75%| 33| EUR| 2250m| Telefonica| Feb 2006| | 3. 68%| 4. 37%| 69| EUR| 1750m| Vodafone| Jun 2006| | 4. 07%| 4. 75%| 68| EUR| 300m| * Are investors liquid? (hedge funds) However, according to th e case, investor’s appetite remained high at that time. In fact, bond issuances remained low because corpo order generated change magnitudely more cash flows and made use of cheaper shipway of funding. Market sentiment? (world, Belgium, politics) There has been a lot of deleveraging followed by acquisitions in the away years. Moody’s says the economy of Belgium is only weakly correlated with Belgacom’s credit quality. However, for companies that are partly owned by the declare, the credit quality of the Sovereign may play a greater role. At that time however, there was no semi governmental complications in Belgium yet. In 2006, the subprime crisis had not begun yet either. Hence one could argue the political setting was relatively clear.Moreover, there were strong liberalization policies pushed by the EC and investors were terror-stricken that the Belgian state would disinvest in Belgacom after the following elections. The Belgian state had already to dive st, keeping 50,1% of the share. Therefore, investors wanted an amends against a change of accountant in case the Belgian State change his participations but also to cover the risk against an LBO. As Belgacom could not introduce a step forward run-in, it could have had an impact on the credit spread by increasing it. * book of facts Spread volatility Credit spread rose significantly more for telecom companies in 2005-2006.This was due to the fact the telecom companies ventured more in acquisition activities during that period. 5-year and 10-year credit spread for A-rated telecom companies respectively rose 10bp and 20bp during that period. * Saturation effect in investors portfolio? Are investors sick of telecom bond issuances? In principle, investors were not sick of telecom bond issuances as the one of Belgacom would add diversification to their portfolio. What is more, Belgacom was seen as a safe and relatively liquid company as they were previously weakly leveraged. * Amoun t embossed in the pastAs far as Belgacom is concerned, the company has never issued any bond. Hence this was a premiere for the company. If we look at the issue amount of comparable transactions in the peer group of the same year, telecom issuers have issued in 2006 from three to 5 times with an issue amount from 500 million. For example, Telefonica issued in 2006 a total of 11. 750 million € * Credit quality of issuer and peers In cost of credit quality, Belgacom is better than most competitors. This is mostly due to the fact that Belgacom was weakly leveraged before the issuance.For instance, EBITDA/Interest expenses of France Telecom, Telecom Italia and KPN was between 2. 4x and 7. 2% while Belgacom’s was 93x. However, Belgacom wasn’t the best according to credit rating agencies. The considered peer group is made of France Telecom, Telecom Italia, KPN and Belgacom. Moreover, Moody’s seems to give to Belgacom a better rating that Fitch. Therefore, we m ay suppose that Belgacom’s cost of issuance may be slightly lower than those of his peer group. Question 6 What is a change of withstand put provision? How would it have protect investors?Why did some investors think the come on style would not be useful? Looking at the place language, what would be the coupon rate if the rating of Belgacom was down sortd a) to BBB- (S&P)/Ba1 (Moodys)? b) to BB+ (S;P)/Ba1 (Moodys)? A change of control put provision is an option given to the bondholder to get its bond repaid before maturity at par or above, in the event of change of control followed by a rating downgrade (e. g. after an LBO). Companies may be reluctant to issue bonds including this clause, because it can place more constraints on their finances as investors have the power to control repayments.Besides, it protects investors so they can have the opportunity to change their investment decision schema if the issuer would happen to change its ownership. In case of a LB O, for example, the ownership of the company is transferred by using debt relying on the future cash flows of the company. According to (Rosenbaum et al. , 2007), â€Å"a target only represents an attractive LBO opportunity if it can be purchased at a price and utilizing a financing structure that provides sufficient returns with a viable exit strategy. In such a case, a former bondholder would see the credit risk he faces considerably increase, given the amount of additional debt back up by the company. This clause should then enable a bond investor to exit his position without bearing that increased risk because firstly, the change of control was likely, since the Belgian government was pursuance to sell its stake in Belgacom and secondly because some argued that the inclusion of a step-up language taking the form of a +50bp in interest payment per downgrade below investment grade would be far from compensating the additional risk they would be bearing.In the case of Belgacom, there were some concerns about this possible withdrawal of Belgian state from its majority stake, intensified by the fact that the company could also be the target of a potential LBO operation as explained above. In order to reassure future investors and consequently lower interest rates for long term bonds (10 years), it has been considered to include such a clause in the deal. Therefore, Belgacom in conclusion decided to add a step-up language despite the concerns emitted by some investors.The main benefit of the step-up language is that investors will usually get the initial coupon above the market and will also know what is to expect from their bond(s) over a longer-term period. However, bonds including a step-up language present the disadvantage of being callable by the issuer in order to issue it at lower rate to abridge their cost of borrowing which is the reason why some investors were reluctant concerning the step-up. In the case of Belgacom, a downgrade in the rating w ould have had the following impact on the coupon rate: ) If the rating of Belgacom would have been downgraded to BBB- (S&P) / Ba1 (Moodys) and if the lowest rating is interpreted into account which is Ba1 (one grade below investment grade), the interest paid (coupon rate) would have increased by +50bp. b) In this scenario, both rating agencies consider a one strait downgrade below investment grade leading therefore to a +50bp increase in the interest rate paid. Bibliography BERK J. , DeMARZO P. (2011) â€Å" incarnate Finance †Global edition” Second edition, Pearson edition, pp. 001 FABOZZI F. (1991) â€Å"The handbook of Fixed Income Securities”, Mc Graw-Hill edition, trine edition, p. 224 FAMA E. (1998) â€Å"Market efficiency, long-term returns, and behavioral finance” Journal of Financial Economics, 49, pp. 283-306 GLAZER A. (1989) â€Å" erudition bridge financing by investment banks †bridge financing, as source of revenue for investment ba nkers, poses risk and conflict of interest” Business Horizons magazine, Sep-Oc 1989, Website: http://findarticles. om/p/articles/mi_m1038/is_n5_v32/ai_8120675/ (Seen in April 2012) ROSENBAUM J. , ivory J. (2009) « Investment Banking : Valuation, Leveraged Buyouts and Mergers ; Acquisitions » Wiley finance Vodafone Non Official Website : www. vodafonews. com/belgique. hypertext markup language (Seen in April 2012) ——————————————†[ 1 ]. www. vodafonews. com/belgique. html [ 2 ]. Exhibit 13\r\n'