TelstraClear faces loan crisis

By PETER GRIFFIN

TelstraClear has until the middle of next month to refinance $600 million of loans vital to its survival.

The company, formed through the $435 million merger of TelstraSaturn and Clear Communications, originally faced a deadline of June 12 to repay $510 million of the $600 million loan facility borrowed from a syndicate of banks to extend its network.

A three-month extension has given TelstraClear until September 12, and the company has indicated it is seeking to refinance the full $600 million loan at that time.

Chief executive Rosemary Howard said the extra time was needed for the board to weigh up its options for refinancing.

But there is speculation that TelstraClear may have had difficulty borrowing because of the state of its books.

It sank deeper into the red last year with a loss of $288 million, including a restructuring charge of $56.5 million and writedowns totalling more than $50 million.

The company had current assets totalling $113.5 million against current liabilities of nearly $1.3 billion. Net cash outflow totalled $88 million.

Analysts expect TelstraClear to refinance with the help of parent Telstra, which has good access to capital owing to its high credit rating.

But TelstraClear's accounts for last year, released to the Companies Office last month, show a great deal of uncertainty about the future.

By March, shareholders Telstra and Austar had not pledged their financial support should TelstraClear be unable to renew its loan facility.

That set alarm bells ringing at TelstraClear auditor Ernst & Young, which said the company had a "deficiency of working capital" and needed to secure more finance to keep trading.

"The group has $510 million of financing falling due on June 12, 2002, for which future financing will be required. This condition raises substantial doubt about the group's ability to continue as a going concern," an Ernst & Young report prepared in March read.

Alan Robb, senior lecturer in accountancy at Canterbury University, said it was ominous Telstra had not committed itself to financially support TelstraClear just a few months before refinancing was due.

"If Telstra is seriously behind the New Zealand operation, then I would have expected them to have indicated that they would be supporting that financing, then they wouldn't have had the fundamental uncertainty qualification from the auditor."

Howard said the situation had improved and the auditor was more confident in the company's future.

"In the next auditor's report, I'm pleased to say that references to fundamental uncertainty are no longer there," she said.

A TelstraClear spokesman said the company had convinced its auditor the finance would be obtained.

When TelstraSaturn and Clear Communications merged last November, Howard said she expected the new company to be profitable in two to three years - a limit she is still committed to.

"We've turned the corner in terms of being ebitda [earnings before interest, tax, depreciation and amortisation] positive. Six months of restructuring and downsizing has finished. Now we're waiting on the interconnect and wholesale determinations."

TelstraClear went to the Commerce Commission in May asking it to set the prices it pays to connect to Telecom's network and buy wholesale services.

Commission spokeswoman Jackie Maitland said a draft determination on interconnection would be issued to Telecom and TelstraClear this week, with another opportunity for submissions after that. A final determination is expected in mid to late September.

Better terms on pricing would give TelstraClear the foothold it needs to make inroads against Telecom, but analysts say the business case for TelstraClear being in the market at all is marginal.

A Deutsche Bank report written just after the Clear acquisition said TelstraClear would remain unprofitable for years.

"The combined TelstraSaturn business is expected to continue to generate an average loss of $180 million per annum over the next few years.

"While we believe that there is potentially an exciting opportunity for Telstra in developing Clear, we are sceptical that TelstraSaturn's residential telephony and cable will ever earn its cost of capital," the report read.

Merrill Lynch telecoms analyst Patrick Russell said Telstra's AA minus credit rating would ensure the money needed to prop up TelstraClear was obtained.

He thought it possible that TelstraClear could turn a profit in three years - if it concentrated on generating business on its existing network.

"If they launch an aggressive roll-out in Auckland, it will make that [profitability target] difficult."

Extending the network to residential areas of Auckland is exactly what TelstraClear has on the cards, however gaining council approval to hang overhead cables from powerpoles around parts of the city and a legal stoush with lines company Vector still stand in its way.

An up-to-date picture of TelstraClear's financial position will be presented when Telstra unveils its results for the year to June 30 on August 28.