By Andrew Willis
Two years is an eternity at most public companies. Yet Telus (TU) took care of a balance sheet problem Tuesday that seems way out on its financial horizon, by refinancing bonds that that don’t come due until 2011.
In moving early, Telus chief financial officer Robert McFarlane deserves full marks for avoiding a credit market traffic jam of epic proportions that is beginning to develop.
Telus is re-jigging its balance sheet ahead of an unprecedented flurry of refinancing activity. More than $4.2 trillion (U.S.) of high-yield corporate debt comes due between now and 2014, straining a credit market that remains fragile after last year’s meltdown. Traffic will build in earnest in 2011. In steering clear of this mess, Mr. McFarlane has set out a road map that other smart, nimble CFOs can follow in coming months.
That $4.2-trillion-of-debt figure comes from Morgan Stanley, which had its fixed income experts add up all the high-yield bonds, leveraged loans and commercial real estate loans that mature over the next five years. In 2011, the same year that Telus has $1.95 billion of notes coming due, Morgan Stanley says demand for commercial real estate loans will peak, with $560 billion of debt that needs to be rolled over. That same year, lenders must cope with $113 billion of leveraged loan maturities and $64 billion of high yield paper.
“At best, these maturities will strain credit capacity; at worst, they will prolong the credit crunch,” said the Wall Street investment bank. The burden of refinancing is expected to be so heavy that some companies, developers and private equity funds will be forced into other strategic options, such as selling assets.
With that wave of corporate debt bearing down on the market, it makes sense to get out of the way. And that’s just what the Vancouver-based telecom company did.
Telus will redeem up to 30% of a bond issue that was used to help fund the purchase of wireless rival Clearnet Communications back in 2000; the company estimates it will retire a total of $583 million. In coming months, analysts expect the entire $1.95 billion loan may be replaced - it carries an 8% interest rate.
In its place, Telus borrowed $1 billion (Canadian) by issuing new 10-year notes on Tuesday, and this debt pays a 5.05% rate. Scotia Capital and CIBC World Markets led the offering.
After looking at the telecom company’s spruced up balance sheet, BMO Nesbitt Burns analyst Peter Rhamey said the refinancing is “positive for investors. We expect that should Telus be able to raise debt in excess of its redemption target, it would move to redeem more of its 2011 maturity in early 2010.”
Other debt-heavy Canadian companies would be well advised to take similar steps in coming months