Globe to buy back $300-M bonds

The Bangko Sentral ng Pilipinas (BSP) has approved the redemption by Globe Telecom of $300-million senior unsecured notes in April this year, five years ahead of its original due date.

Based on current market rates, Globe expects to realize cumulative after-tax savings in interest expense of about P2.32 billion over the remaining life of the notes.

However, this year, there will be a one-time impact to Globe’s net income of about P1.17 billion, largely non-cash in nature, coming from the decline in mark-to-market values of the related derivatives. "But this will not undermine our core operating performance and will even improve out longer-term financing cost profile as after-tax savings of P444 million a year in interest expense is generated over the remaining life of the notes," Globe chief financial officer Delfin Gonzalez Jr. said.

To finance the early redemption, Globe recently signed an underwriting agreement with Standard Chartered Bank for a P5 billion corporate note issue expected to be finalized by next month. In addition, the company is finalizing another refinancing loan of $50 million.

Gonzalez said the balance of the amount to be prepaid, or around $150 million, will be sourced from internal funds. Globe is securing the requisite credit consents to permit the call.

The company said it is redeeming the notes to take advantage of the low interest rate environment. Globe will make the formal call to the trustee sometime next month after refinancing has been secured.

"This validates the soundness of our debt restructuring approach. In 2002, we built in a call option to provide us the flexibility to redeem the bonds should interest rates fall," Gonzalez said.

He explained that changes in the value of the call option on the $300-million notes fluctuates or changes, depending on market forces. Some of the key factors that drive this value are the price of the underlying bond, interest rates, time to maturity, volatility of the price of the bonds, and Philippine credit spreads.

Changes in the value of the option are charged to Globe’s P&L. An increase in the value of the option is recorded as a mark-to-market gain, while a decrease in the value is reflected as a mark-to-market loss. The value of the derivative is reflected as a derivative asset in Globe’s balance sheet.

In emphasizing that the accounting impact of bond redemption will not affect Globe’s operating performance, Gonzales added that even if Globe opted not to redeem the notes, the mark-to-market value of the call option would still have been charged to the P&L over the life of the notes. However, reversal to the P&L is accelerated due to the early redemption of the notes.

For the first nine months of 2006, Globe reported strong earnings growth with net income of P9.3 billion, up 45 percent from the same period in 2005 on the back of sustained subscriber growth, focused execution of marketing strategies, and effective cost management.

"As we refine our processes and reengineer our systems, we expect that we will continue to optimize our cost structures across the whole organization," Gonzales pointed out.