Bank Deal Takes The Pressure Off Reach

Sydney Morning Herald

Tuesday April 15, 2003

Colin Kruger

Telstra and Pacific Century CyberWorks (PCCW) finally struck a deal with a banking consortium to refinance $US1.5 billion ($2.5 billion) worth of loans with their struggling joint venture, Reach.

As announced in yesterday's Herald, the agreement will see the two partners effectively pay off close to $US300 million of the loan with an advance payment on their network capacity purchases from Reach.

Telstra and Hong Kong-based PCCW also agreed to purchase 90 per cent of their network capacity requirements through Reach until the remaining debt is paid.

In return, the banks have lifted all debt covenants, meaning there is no longer a trigger for early debt repayment. The banks have also pushed the remaining $US1.2 billion principal repayment, due in 2006 and 2008, back to December 31, 2010.

Telstra chief executive Ziggy Switkowski said Reach was now in a position to meet its financial obligations after struggling with what he admitted was a ``pretty leveraged balance sheet" and plummeting prices.

Telstra's chief financial officer David Moffatt said: ``Reach now has the appropriate structure to live within its financial means on a go-forward basis."

Analysts said the deal generally was a good one for all parties, although Telstra shares finished 2c lower at $4.22.

``Despite the market's reaction we believe it's actually positive. It removes a degree of uncertainty for investors," UBS Warburg analyst Tom Smeallie said.

Standard & Poor's said the refinancing would have no effect on Telstra's debt rating, with a particularly important aspect of the deal being that debt-laden PCCW, not Telstra, had to cough up the cash.

The two companies agreed to contribute $US143 million each in prepayments, to pay down Reach's debt with the balance being paid out of Reach's cash reserves. But Telstra's contribution will be via a partial redemption of a $US190 million convertible note it holds with PCCW.

On the downside, Telstra and PCCW would only be able to receive the prepaid services when Reach started generating free cash flow, which Dr Switkowski estimated would take two years.

Telstra executives assured the market that purchases from Reach would be at market rates, and Telstra is protected against further market falls.

But the jury was still out on who really won the game of ``hard ball" to get the better deal given that the debt was non-recourse to Telstra and PCCW.

Telstra was apparently holding out for the banks to write off part of the debt and promised that no further cash injections would be put into the business, which the company valued at zero, after a $1 billion write-off in February.

But both Telstra and PCCW viewed the company as a strategically important asset, meaning a compromise was always the likely result.

``They've got as good a deal out of it as we might have expected," Macquarie Equities analyst Ian Martin said.