Telecom Italia's 7.721% coupon senior unsecured notes (Cusip #87927VAV0) of 6/4/38 were off about 2 points yesterday (and its common stock was off 3.35% yesterday to $7.21). I believe the price drops could be largely a result of the current chaos with the Italy elections.
The FTSE Milan Index dropped 4.89% yesterday. There was a huge $2.5 million face sell order on the Telecom Italia unsecured note yesterday at 105.75; it closed at $107.99 on Monday. In early February, Telecom Italia said it would halve its dividend over the next three years and raise up to $3 billion in debt and equity in order to maintain its rising investments. Although halving the dividend wasn't good news for its stock, I considered it a prudent move. Preserving its cash by cutting its common stock dividend should mean there would be more available cash to cover the interest payments on the 7.721% Telecom Italia note and any newly issued debt and equity.
Telecom Italia has been going through challenging times. Its 7.721% coupon senior unsecured notes (Cusip #87927VAV0) of 6/4/38 traded in the upper 80s last summer with the European debt crisis and I took a position at that time in these bonds. After the crisis ended thanks to Mario Draghi and the ECB, yields on Spanish and Italian sovereign debt plunged from highly elevated levels, and Telecom Italia bonds were on a tear, trading as high as 115 last month. This bond is rated investment grade-Baa3 by Moody's, BBB by S&P, and BBB by Fitch. It is currently available at around 105.15 for a 7.27% yield to maturity, which I consider to be an excellent entry point. This is 9% lower than its 115 high last month.
This is one of the world's largest telecommunications companies and this security is rated investment grade. Most other investment-grade bonds with similar maturities are currently trading in the 5-6% rate range which gives the investor a 100-224 basis point advantage.The bond price was initially hit by a downgrade from Baa2 to Baa3 by Moody's on 2/11/13 following the company's announcement of its 2012 year-end results, updated management outlook and revised financing strategy. Here is the Moody's downgrade.
Telecom Italia Group (TI) is the leading integrated telecommunications provider in Italy, delivering a full range of services and products, including telephony, data exchange, interactive content and information and communications technology solutions. It is also the operator of one of the three national TV networks. The group reported some 14 million fixed-network physical access telephone lines and 32.2 million mobile telephone lines in Italy as of 12/31/12. This group is also one of the top telecoms players in Argentina, with 19 million mobile customers, and in the Brazilian mobile market, operating through its subsidiary Telecom Italia Mobile Brasil, which had 70.3 million mobile telephone lines as of 12/31/12. Telecom Italia's major shareholder is a consortium (Telco S.p.A.) composed of Telefónica, the insurance company Generali, and the banks Mediobanca and Intesa Sanpaolo. This consortium holds a 22.4% stake in TI as of 12/31/12 and is governed by a shareholder agreement. Telco S.p.A. has some $3.4 billion Euro of debt to finance the shareholding of TI. This debt is not accounted for in TI's adjusted debt figures, but is serviced from TI's dividends.
Additional disclosure: I own Telecom Italia bond Cusip 87927VAV0