But to no avail for its crushed shares.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Telefonica Deutschland, the struggling German subsidiary of the struggling Spanish telecom giant Telefonica S.A., announced that it issued €200 million of bonds, including a small tranche of undisclosed size, maturing in about one year, with blockchain technology:
For the first time, the transaction will demonstrate the capabilities of the Blockchain technology in combination with a traditional financing process and a larger number of investors. With the innovative use of this digital technology, all participants are promoting the development of more efficient and transparent processes in the German economy.
The company lost €178 million in the first three quarters in 2017 after losing €1.76 billion in 2016. Its shares — the portion that is publicly traded — at €4.10, are down 30% since October 2015. The shares of its Spanish parent, Telefonica S.A., at €8.20, are down 40% over the same period.
The company could certainly do with attracting more shareholder interest.
The company enthused that blockchain technology allows for direct and secure financial transactions in real time by blocks of data that are stored and encrypted on multiple servers. It hopes that the new technology will lower servicing costs and diversify its financing strategy.
But if the plan was to levitate the firm’s shares by adding “blockchain” to the press release, it hasn’t quite worked. Telefonica Deutschland’s shares continued to decline, and the Spanish parent saw its shares close on Friday at the same level of three days ago. It can’t have helped that on the same morning, Spain’s second biggest bank, BBVA, reported that it booked a capital loss of €1.12 billion on its 6.7% stake in Telefonica SA for 2017 — over €300 million more than the bank had provisioned for.
Telefónica is not the first household brand to try to use blockchain technology to issue bonds. In June 2017, Daimler AG floated a small part of a €100 million German bond using blockchain technology. The company did not confirm how much of the debt was floated this way.
Asked by The Wall Street Journal how a blockchain bond actually works, Kurt Schäfer, head of treasury at Daimler, said:
“The borrower, the bank and the investors all receive access to a decentralized customer portal. Drawing certificates and contracts are confirmed in there. A so-called smart contract [a computer protocol intended to facilitate the negotiation of a contract] automates the management of the order book.
A [digital] token is generated on the blockchain once the loan contract is signed. The smart contract then allocates a number of tokens to investors. Compared with a conventional bond issuance, blockchain can significantly speed up the process.”
Other advantages may include greater transparency, reduced administrative burden and the possibility of managing information more effectively without the need for a central control unit. But beyond the excited noise and chatter generated by the blockchain-related headlines, the mundane reality is that companies like Daimler and Telefónica are still merely at the testing phase. As Schäfer concedes, there are still a lot more questions than there are answers:
“Who is responsible for a potentially faulty program code? Are smart contracts an automated execution of a conventional contract? Is the paper form still indispensable for contracts? As long as these and other questions have not been answered by the regulators, transactions cannot be displayed by blockchain only.”
Telefonica S.A. still has to find a way to reduce its gargantuan €50 billion debt load, especially with financing costs expected to increase this year as the ECB tapers its bond purchase program. As one of Europe’s biggest beneficiaries of the ECB’s corporate bond buying program, Telefonica S.A. is likely to feel the pinch more than most other firms.
While the ECB discloses the names of the companies whose bonds it has acquired, it never discloses the amounts acquired. According to estimates by Wolfgang Bauer, manager of the retail fixed income team of London-based M&G Investments, the five European firms that have benefited the most from Mario Draghi’s corporate debt purchase program are Anheuser-Busch InBev, Daimler, EDF, Telefonica and Eni.
Thanks to the ECB, these five companies have managed to record historic lows in the coupons offered on their new debt issues. But he warns, the companies that have benefited the most from the ECB’s bond buying binge are also likely to suffer the most from the withdrawal of the stimulus, as their funding costs surge back to levels more in line with their financial reality.
For Telefonica the withdrawal pangs could be particularly pronounced given that even with the benefit of ECB stimulus, it’s still struggling. To raise much-needed capital and pay down some of its debt, it’s looking to divest some of its operations in Latin America, which provide 45% of the group’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), a measure of operating cash flow.
At the same time, the firm faces rising revenue pressures in its biggest market, Europe. In June the EU abolished roaming charges, meaning travelers can call, text, and use their mobile data at no extra cost, regardless of the EU country they’re visiting. The traveler’s gain was the operator’s loss. Analyst firm Juniper Research has estimated that globally mobile operators will lose billions in 2018 as a result of the changes. Operators took home €17.3 billion in 2016, with that figure expected to plummet by almost half to €9.9 billion in 2018.
In other words, as Telefonica’s revenues shrink, the costs of servicing its debt are likely to rise, possibly very sharply. And that can be a heady cocktail for any firm, even one that is toying with blockchain bonds. By Don Quijones.
Right at the front of the ECB’s monetary welfare queue is the government of Italy. Read… ECB Spawned Mass Culture of Financial Dependency that’s Now Very Hard to Undo
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