George Pitcher: A case of crossed wires in the telecoms sector

There is much concern about the potential health risks of mobile phones, but what of the financial risks that the telecoms sector faces?

It was reported recently that mobile phones are to be sold with health warnings. Wealth warnings might be more appropriate, given that the major banks have started to blow the whistle on the levels of debt to which they’re exposed in the telecoms sector.

In my column a fortnight ago, I referred to rising bank provisions for bad debt being an indicator that the end is nigh for growth markets. This week, the Bank of England issued a stern warning that telecoms companies may have over-extended themselves on their debt portfolios. The bank’s twice-yearly Financial Stability Review singles out telecoms companies as particularly vulnerable.

According to debt consultancy Capital Data, telecoms companies have run up a collective, international debt portfolio of about &£290bn. Bank of America heads the global lending league with about $48bn (&£34.3bn) exposed to the telecoms sector. Of the UK banks, HSBC appears to have inherited the lending habits of Midland Bank by being out in the lead with &£15.7bn committed to telecoms companies. Close on its heels is Barclays, at &£15bn; then comes Royal Bank of Scotland at &£7.8bn, with Lloyds TSB next up, clocking a thrifty &£4.3bn.

The wise Old Lady of Threadneedle Street (invariably wise after the event) warns that it may be demanding for lenders to properly assess risk in a telecoms market that is moving so fast. This is just a more level-headed version of the dot-com problem of earlier this year – markets breaking new ground are not usually markets that it pays to throw money at.

The mobile phone market is now largely saturated and, with growth anticipated in secondand third-generation technological applications, no one has any idea where these markets are going other than that they are expected to go there strongly. As Nokia noted around the time of its profit warning earlier this year, periods of retrenchment are typical under these circumstances.

That, if you like, is what happened to dot-com companies this year – the Internet and its related markets are not going to go away, but the levels of investment overtook themselves and the industry’s ability to support them.

But just because we’re familiar with this lending syndrome in vanguard markets, we shouldn’t become inured to the effects of what is happening. The banks, as ever, look like they may be about to ask for their umbrellas back just as it starts raining in the telecoms sector. In this context, it’s worth noting that BT last week raised a &£7.1bn bond at a stonking 7.5 per cent interest rate, a premium of some two per cent more than US treasury bonds. As a quasi-monopoly, BT in the mid-Nineties was able to raise funds at the same levels of security as Government bonds.

People are obviously growing twitchy about telecoms out there. It’s not just the Bank of England either – last week the Financial Services Authority counselled 34 banks to watch their exposure to the telecoms sector. In the New Year, we can expect to find lenders leaning on telecoms companies much in the way that BT has just been leant on.

Comparisons are made with the banks’ over-lending to the property sector in the Eighties, though I don’t think that this argument takes due regard of the fact that property developers ahead of the 1987 crash were hardly breaking new ground, as the telecoms sector is today. In fact, property companies were – literally – breaking very old ground, in parts of the world such as Docklands. Bricks and mortar were meant to be the safest return around. Tell that to the Reichmann family, who got stuffed in the late Eighties in Canary Wharf.

The point here is that the lending banks never seem to learn, do they? When a sector downturn or a recession appears, the banks are invariably to be found behind the curve, as it were, rather than in front of it. Why is it that the banks have to be warned that they are over-exposed to a sector, rather than being the ones to warn a vulnerable sector that it may become over-exposed? I thought entrepreneurs were supposed to take the risks, while banks were the prudent ones.

I understand that free markets require risk-takers to have access to capital for growth to occur and that it isn’t down to the banks to warn their clients about their market prospects. But over-extension of debt in one sector, such as telecoms, affects all the others. Bad debt provisions are reflected in higher interest rates and limited lending to the rest of us. The banks’ over-exposure in one sector consequently can turn a sector collapse into an economic mini-crisis, or even a full-blown recession.

UK banks did this with Third World debt in the Seventies and Eighties, as well as shovelling our money into the subsiding foundations of the property sector. And note, if you please, that this week’s review warns about the banking systems in Argentina and Turkey. Here we go again.

I also note that Vodafone has just bought a 15 per cent stake in Japan Telecom for &£1.7bn in cash. Vodafone does not bear the debt restraints of BT and this is an excellent opportunist move. But it would be a shame if companies such as this, up on their toes and dealing hard, are ultimately hide-bound by a pedestrian and unimaginative western banking industry.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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