KEY POINTS:
The Yellow Pages bond issue may raise as little as $100 million - one-third the amount targeted when it was announced at the start of the month - as concerns about a global credit crunch dampen appetite for risk.
A briefing to outline the size of the issue was deferred yesterday because of a technical issue and will now be held tomorrow.
Advisers working on the deal moved to quell any market speculation that the issue was about to be scrapped, indicating that they had established demand for an issue of at least $100 million.
It is understood that the rate of return will be between 11 per cent and 11.25 per cent, although pricing won't be finalised until after the offer size has been confirmed.
Investment banks ABN Amro, Deutsche Bank and Barclays were originally seeking $300 million to cover funding they have underwritten. They initially canvassed brokers about a yield of between 10 and 11 per cent.
But market concerns about Yellow Pages debt levels combined with the global credit crunch of the past three weeks have forced a downsizing of the issue and an increase in the rate of return.
Yellow Pages was sold by Telecom in March to a private equity partnership of CCMP Capital Asia and Teachers' Private Capital for $2.24 billion.
At 13.2 times Yellow Pages' forward earnings, the deal was described at the time as the most expensive private equity transaction in Australasia.
The extent to which it has been funded with debt is also believed to be extremely high by historic standards.
The Yellow Pages group may be carrying debt equivalent to between 9 and 10.5 time earnings before interest, tax, depreciation and amortisation, sources say.
"We've come from an environment where risk appetites were phenomenal and credit conditions were favourable," said ANZ National Bank chief economist Cameron Bagrie.
"We have seen a turn in the credit cycle - but to what I'd call a more normal economic environment." As the market went through that transition it was inevitable that life would become more difficult for some players.
Yellow Pages already has indicated that the offer will be for six-year secured, subordinated and cumulative debt securities, with a fixed rate of interest to be paid on a semi-annual basis until maturity on October 31, 2013.
That means the bonds won't be the lowest-ranking debt on the Yellow Pages books but they will rank behind the banks.
They were not expected to be formally rated and would likely be well short of investment grade if they were, markets sources say.
The cash raised will be used to repay part of the acquisition funding. Most of the finance for the Yellow Pages purchase has been syndicated to 21 banks and institutions.
But $300 million has been underwritten by investment banks ABN Amro, Deutsche Bank and Barclays. If the current bond issue only raises $100 million the remainder of that $300 million must still be raised on debt markets.
It is likely the banks will try to organise another bond issue in Australia or other overseas markets.
They may also look to raise more in the New Zealand market after a year or so when it is less risk averse.
At the time of the sale of Yellow Pages to the private equity consortium it was tipped that the company may be floated on the NZX after three or four years. The consortium has indicated that should it do that, note holders would get a 2.5 per cent discount on the initial public offering price.
BOND ISSUE
* Originally targeted $300 million
* Now aiming for $100-$150 million.
* Telecom sold Yellow Pages to a private equity partnership of CCMP Capital Asia and Teachers' Private Capital for $2.24 billion.
