ANALYSIS:Time is running out for Eircom in its high stakes poker game with lenders over €3.7bn debts

EIRCOM’S DEBT restructuring process is like a bad game of poker. The stakes are high and all the players are being cagey. It’s not pretty to watch.

On one side of the table you have a co-ordinating committee representing about 200 lenders – some Irish, most of them overseas. They are owed about €2.6 billion and would like to get as much of their money back as possible.

Facing them, complete with baseball cap and designer shades, is the Singaporean shareholder, STT, with the employee Esot on its shoulder, hoping for a piece of the action. STT currently has a 65 per cent stake in the business, which is struggling in the recession.

On Monday, STT finally showed its hand by submitting a debt restructuring proposal to Eircom’s independent directors. The bet it threw on the table was lower than expected and has left its opponents somewhat cold.

In essence, STT is offering to inject €200 million into Eircom but with strings attached. This payment will comprise €100 million upfront and a second payment for the same amount 12 months later. There is one significant condition. If Ireland leaves the euro within that 12-month period, STT wants its money back. All bets are off.

STT has reasoned that Eircom’s revenues would collapse with the switch into punts while its debts (which would be €2 billion net under STT’s proposal) would remain in euros. It would be an unsustainable debt burden for the company to manage.

STT had previously indicated a willingness to invest €300 million, in partnership with the employee Esot, its fellow shareholder in the business, and possibly a private equity group. The Esot is not part of the latest proposal although talks continue and it could be added at a later date.

STT’s proposal also involves the first-lien lenders taking a 25 per cent upfront haircut on their €2.6 billion in debt. There would, however, be staged payments, by way of a €250 million restructuring fee, paid over the next four years. This would reduce the pain to the lenders.

This would be paid from Eircom’s own resources. It had cash balances of €392 million at the end of October. Lenders scoff at this idea, arguing that this cash pile is effectively their money, given that Eircom breached its banking covenants during the summer. The company is currently operating under a waiver from the bondholders, which was to be renewed yesterday.

The payment of this fee would have the effect of giving the senior lenders 87 per cent recovery of their money in the long run. Still, the 13 per cent haircut implied is higher than the original 8 per cent proposed by STT.

Under STT’s latest proposal, the senior lenders would be given a 25 per cent stake in the business. STT would keep 75 per cent for itself.

Senior management would be given 10 per cent equity participation from these holdings and STT has agreed to underwrite a €75 million revolving credit facility for Eircom, if the company can secure matching funds.

Eircom’s independent directors met on Wednesday to consider the proposal. The lenders were briefed on Monday. “To say the reception from them was cool would be an understatement,” commented one informed source.

Sources close to STT argue that the revised proposal reflects uncertainty around the euro zone financial crisis although it seems the Singaporeans do not expect to have to cash in this insurance policy.

The equity it would inject into the company would enable Eircom’s management to crack on with their plans for a fibre network roll-out. This investment is badly needed at a time when Eircom’s revenues and earnings are under significant pressure in the recession and from competitors, notably cable TV group UPC.

STT argues that it is a strategic investor and not just a sovereign wealth fund, as some would suggest. It cites the turnaround of fibre network owner Global Crossing as evidence of its credentials.

Yet many observers to this elongated process wonder why it has taken so long for STT to propose some meaningful investment in Eircom. After all, it took control of the business in January 2010 for a knockdown €40 million from Australian group Babcock Brown.

What has STT done in the intervening two years to prove that it is committed to Eircom? Sources cite its role in the selection of Paul Donovan, formerly of Vodafone, as chief executive in late 2009 and their support of his efforts to restructure the cost base and draft a new business plan.

Still, Eircom’s business continues to decline. This week, the company said its performance in October was going to plan but below that of the same month in 2010. This picture won’t change for some time and there remain legacy costs in the business that need to be fixed in spite of the labour agreements already signed with its unions.

The lenders hold the whip hand. Ultimately, the decision on Eircom’s future ownership resides with them. They have put their own proposal on the table. The key points are a haircut of 7 to 9 per cent and an extension of the maturity of the debt. They would take full control of the company.

Second tier lenders have also tabled an offer but they seem to have little hope of influencing the process. In total, Eircom owes about €3.7 billion net. All bar the senior lenders face being wiped out.

If STT’s proposals were to get the green light, it is likely to be executed via an examinership process. But that is a big “if” right now. The independent directors will have to make a recommendation to the board of Eircom in the near future. It is not clear if that will happen before the Christmas break. Can the directors persuade either side to bend in the interests of everyone? As things stand, the lenders will require some persuasion to entertain the proposal from STT. Eircom’s management team and the board would most likely prefer STT to be part of the company’s future ownership. They do see it as a strategic investor.

Would they want a 200-strong group of lenders as the company’s owner? Probably not.

The Government would probably be of a similar mind. As far as the Government is concerned, every international investment made in Ireland right now sends a positive signal to the markets and improves our chances of being able to re-enter the bonds markets again in late 2013. An investment of €200 million by STT is not to be sniffed at in the current uncertain climate. STT has shown its hand but whether this proposal represents its ace card or not, remains to be seen. For now, the lenders look likely to call its bluff. This drawn out game of poker drags on.