Judgment day for 2degrees investment as Trilogy's US$450m bonds mature

Higher mobile prices for Kiwi consumers could be the fallout if a refinancing deal fails, writes Tom Pullar-Strecker.



Telecommunications firm, 2degrees is facing a critical vote of confidence from international investors.

Hundreds of millions of dollars of bonds issued to finance its majority-owner Trilogy International Partners are approaching their repayment date.

But Australian telecommunications analyst, Paul Budde, believes that if the US investment company fails to refinance its US$450 million (NZ$670m) of bonds on good terms, the situation would ultimately translate into higher mobile prices for Kiwi consumers.

Trilogy chairman John Stanton (left) and chief executive Brad Horwitz picked up a corporate excellence award in 2009 ...

Trilogy chairman John Stanton (left) and chief executive Brad Horwitz picked up a corporate excellence award in 2009 from then US Secretary of State Hillary Clinton for their support of a mobile network operator in Haiti. Consumer groups say their investment in 2degrees has also brought huge benefits to New Zealand consumers.

Budde says the refinancing efforts could determine how patient Trilogy might be about realising a return from its 61 per cent share in the loss-making mobile operator.

"If you have to pay more for your money, that works its way through to consumers," he said.

Trilogy's bonds - most of which were issued in 2010 - are due for redemption in August. This means the investment firm will either have to persuade existing bondholders to extend their term, or issue fresh borrowings before then.

Credit ratings agency Moody's said in a "credit opinion" that it expects Trilogy to complete the negotiations by the end of this year.

But if Trilogy does not have the negotiations with investors wrapped up by then, that could have "negative implications" for its credit rating, Moody's said.

Trilogy's bonds currently have a "Caa1" credit rating, already putting them in the category of "junk bonds" classed as carrying substantial risks for investors. But the company itself has a slightly higher corporate credit rating of B3.

2degrees posted an improved net loss of $33.6m for the year to December 31, 2014, which took its total accumulated losses since the business began to $362m.

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Spokeswoman Charlene White said Trilogy's refinancing was a matter for the shareholder, which declined to comment.

2degrees chief executive Stewart Sherriff has said since 2013 that 2degrees does not expect to have to go back to shareholders such as Trilogy for more cash to see it through to break-even.

But Budde said Trilogy's refinancing talks were nevertheless the "acid test" of international confidence in 2degrees, since it was Trilogy's prospects in New Zealand that would be central in the minds of bond investors.

Aside from its stake in 2degrees', Trilogy's other major investment is a 71 per cent stake in Bolivian mobile operator NuevaTel, which generates most of its cash.

It sold a third mobile operator in the Dominican Republic, Trilogy Dominicana, for US$62m earlier this year.

"Bolivia is interesting, but in all reality it is about New Zealand," Budde said.

2degrees is regarded by analysts and consumer groups as central to the maintenance of strong competition in the $2b mobile market. IDC Research analyst Peter Wise said the company had a big impact in bringing down mobile pricing.

A study 2degrees commissioned from Venture Consulting in 2012, just three years after it set up shop, estimated the economy had already benefited to the tune of $3.9 billion from its market-entry, which broke Telecom and Vodafone's duopoly.

Moody's said the looming maturity date for Trilogy's bonds posed a "liquidity risk" for the US investor, noting some Trilogy shareholders would also get the right to draw cash out of the business in December.

It said positive considerations included Trilogy's "experienced senior management team" having a significant ownership stake in the business.

Moody's also expects 2degrees' operating profit to increase as the business "reached scale" and forecast Trilogy's Bolivian operations would remain strong, thanks to healthy economic growth and increased smartphone penetration in the South American country.

But it cautions that political or regulatory changes in Bolivia, which it said had a "sometimes hostile business environment", could have a significant impact on earnings.

2degrees' March purchase of Christchurch internet provider Snap should improve its competitive position and help it better serve business customers, it said.

Budde has repeatedly questioned 2degrees' longterm prospects, noting the company was unusual internationally in entering the mobile market at a time when almost all its target market already had cellphones.

He continued to believe 2degrees' situation was "difficult", saying the mobile market had low margins and the firm had "no outlook for a huge improvement".

"I would love them to be successful but you have to be realistic," he said.

Fact File
* Trilogy owns 61.5 per cent of 2degrees.

* The United States investment firm has US$450 million of bonds on issue which are up for redemption in August.

* Trilogy needs to extend the terms of the bonds or issue new borrowings.

* Moody's says financing negotiations will need to be completed this year to avoid the risk of Trilogy's credit rating  being downgraded.

 - Stuff


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