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Bathtime looms for Bell noteholders

By Nick Stride

Friday 1st December 2000

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The fate of a quarter share in the country's largest company, Telecom, could be decided as early as April 1 as Bell Atlantic considers the final phase of its exit strategy.

From that date Bell can elect to call the $US2.455 billion of 5.75% exchangeable notes it issued to international investors in February 1998.

It can choose to pay out in cash equivalent to Telecom's market price or by distributing the 437.1 million Telecom shares it still holds.

Bell, cleverly as it turned out, hedged its currency exposure at the February 1998 exchange rate of 58.65USc.

The subsequent falls in the exchange rate and in Telecom's share price mean redemption by cash equivalent will cost Bell just $US608 per $US1000 face value, a 39.2% discount. That will be very attractive to Bell if it feels Telecom is underpriced.

However, the notes were issued as an exit strategy when Bell needed money for European expansion and wanted to extract the cash backing its Telecom shareholding. The issue structure eliminated its exposure to falls in Telecom's share price.

If it elects to redeem the notes with cash it will have to establish a new exchange rate risk hedge. At that point it might look for a buyer for the strategic stake.

Under the Kiwi Share no one foreigner can own more than 10% of Telecom without government permission. But the stake would merely be passing from one foreigner to another.

Another option is for Bell to place the shares with international institutions.

Since September 1999, noteholders have been able to elect to exchange their holdings for Telecom shares. But the conversion terms mean the share price must be above $9.58 for that to make sense, so none have done so.

If Bell elects to redeem the notes by distributing shares holders will get 178.04 shares for each $US1000 of notes at face value.

That would create a huge potential overhang in the market because some noteholders are likely to be fixed interest investors who would take their losses and reinvest elsewhere.

Bell can also elect simply to continue paying noteholders their interest. The notes are due on April 1, 2003.

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