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Currency fluctuations could upset telco popularity

The capital intensive and competitive nature of the telecoms industry provides investors with plenty of choice – and the sector continues to attract the interest of the global investor community. However, local-currency cash flows and dollar-denominated technology means that such companies are exposed to a currency mismatch which could hurt investment on rate hikes or fluctuations.

Oct 3, 2016 // 4:47PM

In March, Mexico’s America Movil issued a dual-tranche €1.5bn bond split between an €850mn 8-year note at 1.5% and a €650mn 12-year note at 2.125%, whilst Argentine telecoms operator Cablevision issued a US$500mn 5-year (NC3) Eurobond at 6.5% in June.

That same month, Colombia's UNE EPM Telecomunicaciones issued COL540bn (US$173.4mn) in 8, 10 and 20-year local bonds and Telefonica del Peru issued PEN260mn (US$80mn) in 7-year bonds with a yield of 6.66% and PEN70mn in 12-month notes.

In August, the IFC approved a BRL80mn loan to Brazil’s Phoenix Tower Participacoes S.A, and in September Telefonica Chile placed CLP94.4bn (US$140mn) yielding 4.75% in local currency notes maturing in 2021, which was nearly 2.5x oversubscribed.

The level of activity from telecoms companies in the Latin American DCM space is due to the fact that it is a very competitive industry, with companies needing to spend heavily to maintain their market share.

“Telecoms companies are very capital intensive entities, and although we can finance our capex plan with our own cash flow generation, issuing debt to increase our capex enables us to compete with other providers,” said Marcelo Iribarne, head of finance at Cablevision.

Such entities, aside from Oi in its present state, do not find demand lacking. “Fixed income investors are focussed on cash flows, and telecoms companies are cashcows” – meaning these companies are easily able to access capital from the international investor community.

Iribarne added that investors also like the technological aspect of telecoms entities.

Raymond Zucaro, CIO of RVX Asset Management, who has substantial exposure to telecoms, agreed. “I like telecoms in the sense that they are generally stable – despite other financial pressures a country may experience telecoms stays around.”

However, to remain competitive, such entities have to maintain expenditures on the latest equipment, which tends to be sold in dollars.

Zucaro noted that as telecoms bills are paid in local currency, problems can occur if there is a shift in this currency against the dollar.

“Telecoms companies do run the risk of committing the cardinal sin in EMs, the currency mismatch.”

Salvi Folch, CFO of Mexico’s Televisa noted that despite the fact that treasury rates were at historical lows, Latin American issuers were subject to currency volatility – the Mexican peso being a prime example.

In the case of the latter, US rate hike concerns and presidential election fears have led to wide fluctuations. The peso is currently trading at 19.2475 to the dollar compared to 18.8647 in August according to Bloomberg.

Americas Macro Currencies

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