France Telecom breaks record

(Telephony) France Telecom launched a record $16.4 billion debt issue, the largest corporate bond offering ever. According to reports, the deal attracted as much as $25 billion in offers. The sale eclipsed Deutsche Telekom’s $14.5 billion bond sale in 2000.

Originally, France Telecom planned to sell $7 billion to $8 billion worth of bonds but upped the offering when demand skyrocketed. The demand was stoked by premium yields of as much as 8.5% and a “step-up” clause that increases the “coupon,” or interest rate, on the bonds by 25 basis points for every notch the carrier’s debt is lowered below an “A” by Standard & Poor’s or Moody’s Investors Service.

“There is liquidity, there is appetite in the market for telecom paper, but at a certain price. As long as you can pay the price and include step-up language in case of a downgrade, it will sell,” said Carlos Winzer, senior vice president for European telecom at Moody’s Investors Service.

In February, Moody’s cut France Telecom’s debt rating to “A3,” its seventh-highest investment grade, and posted a “negative outlook” on the company’s debt.

The bonds offered included two-year floating rate notes yielding about 1.25 percentage points over the London Interbank Offered Rate and bonds of longer maturity yielding between 2.5 and 3.15 percentage points more than comparable Treasury securities. About $9 billion of the bond sale was in dollar-denominated notes and bonds, and the remainder in euros and sterling.

Proceeds from the sale will be used to pay off $7.4 billion in maturing debt and possibly refinance short-term bank debt incurred from investments in mobile network licenses. Like other large European carriers, France Telecom is under pressure to alleviate a large debt load--about $55 billion--by the end of the year.