Reprieve Expected to Aid Telstra's Offshore Issues

Now that British Telecommunications' jumbo $10 billion global bond issue is out of the way, Australian Telstra's offshore issues, clear losers in recent sessions, can expect a slight reprieve, analysts said on Wednesday.

But while their spreads were unlikely to narrow much near-term, buying opportunities were emerging for medium to longer term investors, said National Australia Bank's senior analyst Phillip Strano.

Telstra's offshore issues not only offered considerable margin pick-up over comparable domestic issues, but also superior credit protection over many of its European counterparts, Strano said.

For example, the telco's U.S. dollar issue due 2005 was trading at around 80 basis points over swap while its domestic 2006 issue was trading at some 50 basis points.

Further, Telstra's single-A plus ratings from Standard & Poor's has a stable outlook and incorporates moderate flexibility for the company to make further strategic investments.

"There is arbitrage opportunities looking at offshore deals," said an analyst. "Event risks still circle this sector and we're recommending a more defensive stance. Offshore issues in the telco sector increasingly include step-up provisions, providing a greater degree of protection," he added.

BT's issue for instance offered step-up coupons that will rise by a quarter percentage point if its ratings fall at least two notches to triple-B plus or Baa1, and more if cuts ran deeper. The downgrade protection is a feature of other telco bond issues this year, among them Deutsche Telecom's $14.6 billion four-currency June megabond issue.