WOM Bondholders Get Burned as Upstart Turns Ever More Ambitious
Published 13 November 2023 10:00:00.0 GMT
(Bloomberg) -- Bondholders in WOM SA are getting burned as the upstart company that grabbed more than a quarter of Chile’s mobile phone market in less than a decade finally seems to have bitten off more than it can chew.
Its dollar debt due 2024 and 2028 has the worst month-to-date returns of any hard-currency bonds issued by Chilean corporates, according to data compiled by Bloomberg. The 2024s have fallen 5.7%, while its 2028s have dropped 7.1%. The 2028’s yield rose to 23.8% from 14.7% a year ago.
After muscling its way into the Chilean market with cut-throat pricing and a brash, unconventional advertising campaign, WOM secured licenses to provide 5G services in Chile in 2021 and said it would finance a sister company in Colombia earlier this year. But its dizzying growth now has investors worried as it burns through cash and faces fines for failure to deliver the services promised. Moody’s Investors Service downgraded WOM two notches on Oct. 31, and warned of more cuts ahead.
“WOM will post negative free cash flow until at least 2025, primarily due to substantial capital expenditure intensity,” Moody’s analyst Cintia Hodge wrote in the downgrade. “This will strain liquidity and hinder the company’s capacity to reduce gross debt.”
The company’s cash reserves slumped to 36 billion pesos in June from 168 billion pesos in December 2022, Moody’s said. The drop fueled concern about its ability to refinance almost $350 million in debt coming due next year.
The bonds slumped in March when WOM said it would invest $100 million in sister company WOM Colombia. Bondholders said that should be done by London-based private equity firm Novator Partners, which owns 100% of both companies, while complaining about extraordinary dividend payments. Delays securing a syndicated loan to prepay 2024 notes also rattled investors.
The bonds fell again after Oct. 31 when Moody’s downgraded the company to Caa1 from B2, or seven levels below investment grade.
In a statement this month, WOM said that it acknowledged the market’s concerns and said it hired Rotschild & Co as advisors to oversee refinancing, which it expects to complete by year-end. It also said that it will reduce its investment in WOM Colombia “to only $16 million,” none of which will be paid out in the next 12 months.
“We have maintained active conversations with each of our potential lenders, who have expressed their confidence in us regarding the refinancing of the bonds maturing in 2024,” WOM said by email.
WOM recently reappointed Chris Bannister, the company’s first CEO in Chile, who had been leading WOM Colombia’s operations.
Bannister should be able to pull off a refinancing deal with banks, said Lucror Analytics credit analyst Sebastian Hofmeister, adding that operating performance remains solid and cash flow should recover in next year. The company’s Ebitda has been growing at double digit rates, according to an emailed response to questions.
“A clean refinancing by year-end would imply significant upside for the 24s and 28s from current depressed levels,” he said by email.
Failure to Deliver
Still, Bannister has his work cut out.
The Telecommunications Ministry announced last month it would charge WOM $50 million for failing to reach a target of 5,000 antennas promised when it won a 5G license. WOM has appealed the decision. The money would come out of a collateral deposit WOM made when it won the license. Some investors think WOM may avoid the payment.
“We continue to expect a negotiated agreement rather than the execution of the 100% of the ($50 million) left as a collateral, as the government is also interested in closing the digital gap in Chile,” Juan Djivelekian, an analyst at Balanz Capital Valores said in a note.
What’s more, the company could sell assets to pay down debts, including its fiber-optic network, according to Sebastian Cruz, an analyst at Lima-based Seminario y Cia SAB.
But for Cruz it’s still too soon to jump in on the bonds.
“The company may still present problems to refinance,” he wrote. “The market is punishing how aggressive they’ve been.”
By Eduardo Thomson