MMS Wireless Revenues to Reach $8.3bn by 2004

Debt, 3G costs put Hutch in danger of downgrade: report

27th November 2002 by Sebastian Tong of The Standard

Hutchison Whampoa's growing debt and the cash flow drag from its third-generation mobile telecom business (3G) put it in danger of a ratings downgrade next year, UBS Warburg has warned.

``Hutchison's current financial profile and evolving business risk are not compatible with its current credit ratings. We could see the company downgraded a notch next year,'' UBS Warburg credit analyst Chia Tse-ern said in a report.

Hutchison has a single-A rating from Standard & Poor's and an A-3 rating from Moody's Investors Service. Both agencies have given the company a negative outlook.

Of late, Hutchison bonds have seen a recovery of spreads in line with the overall performance of Asian bonds, boosted by the Federal Reserve's recent rate cut and the recovery in global equity markets.

Hutchison's benchmark 10-year paper due in 2011 traded between 195-205 basis points over US Treasuries compared to almost 300 basis points a few weeks ago.

``We're questioning whether this move is overdone and whether the market has become too complacent on Hutchison,'' Chia said.

Technical glitches were probably behind Hutchison's repeated rescheduling of the commercial launch of its 3G services in the United Kingdom and Italy.

``Continued delays make achievement of its financial and operational targets less likely and could lead to some negative implications for the 3G loans,'' the report said.

The 3 billion (HK$23.4 billion) loan secured by the company for its 3G roll-out in Europe is understood to contain convenants requiring it to achieve specific sales and subscriber levels by the second half of next year.

``As the first operator of 3G services in Europe, Hutchison will have first-mover advantages. But it will also be a guinea pig for the industry, becoming the first to test the market and to encounter any potential technical difficulties,'' Chia said.

In light of its near-term maturing debt, Hutchison is also likely to issue further debt, UBS said.

The company is already considered highly leveraged, reporting total debt of US$19.87 billion (HK$154.9 billion) in June.

In October, the ports-to-telecom conglomerate had to ditch plans for a US$1.5 billion-equivalent bond issue denominated in euro and sterling due to weak demand from risk-averse investors.

Given the present strength of Asian bonds, now would be a ``good time for Hutchison to come to the market with a bond deal,'' Chia said.

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