Greek crisis weighs heavily on OTE telecom bonds

Hellenic Telecommunications Organization (OTE) SA?s bonds are falling more than those of any of the largest high-yield debt issuers as Greece lurches through a political and banking crisis that may see it exit the euro region.

The 3.2-billion-euro ($4.1 billion) par value of notes that Greece?s largest phone company has in Bank of America Merrill Lynch?s Euro High-Yield index fell 22 percent on average this month. That?s a bigger drop than any of the 50 biggest issuers in the lender?s Global High Yield index, where Petroleos de Venezuela SA notes faced the biggest losses at 9.1 percent.

?OTE?s performance has a lot to do with political turbulence and worries of the economic climate declining even further, which will affect domestic revenues for sure,? said George Satlas, the Athens-based head of investments at Postal Savings Bank, which owns OTE bonds. ?Current political incompetence seems to drive the market now.? The market value of OTE bonds fell by $861 million to $2.6 billion this month, according to Bank of America Merrill Lynch data. That has driven the average yield of its debt to 40 percent from 18 percent.

OTE?s 5 percent bonds due 2013 slumped 26.9 cents on the euro since the end of April to 61.8 cents, pushing the yield to 57 percent, Bloomberg Bond Trader prices show. The yield relative to benchmark German government debt widened to 56 percentage points from 17.5 percentage points.

Credit default swaps protecting OTE?s debt more than doubled this month, surging to 3,709 basis points from 1,692 at the end of April, according to prices compiled by Bloomberg. The debt insurance contracts are the worst performers among European phone companies this month.

?There is an obvious disconnect between the prices at which our bonds are currently trading and the company?s operational performance,? Kevin Copp, OTE?s chief financial officer in Athens, said in an e-mail. ?In the first quarter, OTE group revenues showed their smallest decrease in the last two years and mobile revenues were actually up for the first time in several years, with cash flow generation remaining robust.?

Negative outlook

Fitch Ratings put OTE?s BB rating on review for downgrade last month, citing the contraction in the Greek economy and the lack of a refinancing plan for maturing debt. Still, last year?s earnings were better than expected and its debt to earnings ratio of 2.54 is ?comparable to low BBB-rated peers,? Fitch analyst Bulent Akgul said in an April 16 report.

OTE is rated B at Standard in a term loan, it can?t.

OTE is ?well under way? in implementing a refinancing strategy, ?which is aimed at both extending our maturity profile as well as reducing our overall net debt,? Copp said, without providing details.

?Despite the strong market noise caused by politicians and scared traders with a high-grade mentality, OTE?s 2013 bonds represent an outstanding investment opportunity,? said Stan Manoukian, founder of Independent Credit Research in Agoura Hills, California. When OTE?s debt is refinanced the ?notes will get back to the high 80s to low 90s.?

OTE?s share price plunged more than 15 percent on May 16 after the company was deleted from the MSCI Greek Index. ?Hellenic Telecom bonds are very liquid and represent a technical proxy of Greek sovereign debt,? Manoukian said.