City Telecom launches tender for high-yield bonds

Fixed-line telecom operator City Telecom (HK) has joined a group of Asian companies that are taking advantage of depressed debt prices to buy back their dollar bonds. Late Thursday, the Hong Kong-listed company launched a tender for the entire $89.353 million left outstanding of its 8.75% senior bonds due 2015, offering to pay a maximum of 75 cents per dollar of principal.

The total consideration includes a 3 cent payment for accepting a consent solicitation that seeks to eliminate "substantially all of the restrictive covenants" on the bonds, to reduce the scope of the company's reporting obligations and to amend the circumstances under which the holders can put the bonds back upon a change of control. If accepted, the amendments will give the company more flexibility with regard to whatever bonds remain outstanding after the tender.

The key objective is to buy back all the bonds, though. According to the announcement, bondholders who choose to tender their bonds must also give their consent to the proposed amendments to the bond indentures and vice versa, in other words, they cannot just accept the consent solicitation and hold on to the bonds.

However, bondholders need to tender the bonds and give their consent by April 8 to get the full 75 cent payment plus accrued and unpaid interest. If they respond after that date but before the final deadline on April 23, they will not receive the 3 cent consent payment, resulting in a total consideration of 72 cents on the dollar plus interest.

The tender offer has no minimum acceptance level, but the consent solicitation needs to be accepted by bondholders representing a majority of the outstanding principal. Citi is acting both as dealer manager for the tender and agent for the consent solicitation.

City Telecom has already been buying back bonds in the open market, reducing the bond, which was issued in January 2005, from the original size of $125 million. The buybacks, including the tender, are designed to reduce the company's debt levels and interest costs, while at the same time netting it a small profit from acquiring the bonds below par. The company said it will finance the offer from available cash resources, which at the end of its latest financial year (August 31, 2008) amounted to HK$421.6 million ($54 million).

However, City Telecom has been performing well since the start of the current fiscal year on September 1, which suggests that its cash levels would have increased. In a separate announcement on Thursday, the company estimated that its turnover increased by more than 10% in the six months to the end of February, that Ebitda was up by more than 20% and that its net profit improved by more than 40% -- all compared with the same period a year earlier.

Based on the previous year's results, this suggests that the company expects to report an Ebitda of at least HK$224 million and a net profit of at least HK$66 million in the six months to February. The gains are primarily due to an improvement in its fixed line business, which in the six months to August represented 77.6% of total revenues. In the same announcement, the company said that its number of broadband subscribers increased by 25% to 350,000 in the 12 months to February, while the number of voice-over-IP subscribers rose 13% to 352,000. The number of IP-TV subscribers increased by 25% to 170,000. However, the company did see an 18% fall in the volume of international calls to 245 million minutes.

As of August 31, its total debt amounted to HK$683.6 million, after declining by 28% during the year. Its net debt fell 35% to HK$262.0 million. On that same date, the net-debt-to-net-assets ratio was 0.25 times and net-debt-to-Ebitda ratio was 0.69 times -- both representing record lows since the high-yield bond was issued.

Meanwhile, bondholders will get an opportunity to exit at a higher price than where the bonds have been trading over the past few months. While the bonds are illiquid, there have been some trades done in the mid-60s recently and at one point the bid fell as low as 50 cents on the dollar. Those who would prefer to hold on to the bonds until maturity six years from now, will need to take into account the fact that the bonds are likely to become even more thinly traded if a large portion of the other bondholders choose to accept the offer.

Standard & Poor's, which rates the bonds B+, said it doesn't view the tender offer as a distress exchange and therefore "has decided that it is not tantamount to a default".

"In our view, City Telecom's below-par offer is an opportunistic move to take advantage of the weak market sentiment and depressed bond prices. The company will save on interest expenses on the notes. Essentially, it is swapping its low-yield cash to redeem high-interest notes," the rating agency said in a note. It added that it expects City Telecom to generate positive discretionary cash for fiscal 2009.