“Blockchain Bonds?” Struggling German Telco Joins Bandwagon

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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  22 comments for ““Blockchain Bonds?” Struggling German Telco Joins Bandwagon

  1. Javert Chip says:

    WHAT! The air has got out of the blockchain balloon ALREDY?

    • Rates says:

      Nah, show’s not over till Central Banks rename themselves as Blockchain Reserves.

    • Sergio says:

      Maybe Germans are just smarter.

    • Joan of Arc says:

      I tell you forthwith that this blockchain mania is worse than the tulip bulb and dotcom mania. Tulip bulbs didn’t move up 500% in one day because of a name change, and with a tulip bulb, at least you could eat it during a famine…try eating a bitcoin, but please don’t electrocute yourself if you do.

      • MC01 says:

        This public service annoucement is brought to you by the Blokchain Lemonade Company, incorporated in sunny (and tax friendly) Gibraltar:

        Under no circumstances try eating tulip bulbs: they contain two glycosides, tulipanin A & B, which are toxic to higher vertebrates, including rather surprisingly man. While eating a whole tulip bulb is almost impossible due to its foul taste, tulipanin toxicity increase dramatically with quantity consumed: a small quantity will just result in mild stomacache, larger quantities in dizzyness and convulsions and a large quantity in even direr consequences.

        If you ever feel tempted to eat a tulip bulb, seek immediate medical help. Or just slap yourself in the face: here at the Lemon Blockchain Company we aren’t picky.

        • Joan of Arc says:

          I would guess as soon as you added Blockchain to Lemon Aid Company the stock went up 500% overnight. I noticed you deferred warning against eating bitcoins where one could get a shock of a lifetime. Is this because you deal in them?

    • Kraig says:

      This is just a practical use of blockchain so no need for the user to worry about the token any more than we worry about the database underneath the comments. Since the tokens are hidden internal workingz there is nothing to buy and sell and no hype.

      This is of interest only to technicians, lawyers and kyc/aml people. Now if they released a made up coin that didn’t actually do anything watch the stock value go whoosh.

      Actual useful jobs for the blockchain rarely get a look in.

      • Joan of Arc says:

        Also, don’t attempt to eat a bitcoin as you might get an electrical shock of a lifetime. Keep them off of the floor away from youngsters.

  2. Nick Kelly says:

    I’m not sure there has ever been a solution so desperately seeking a problem.
    And the blockchain facilitates this bond sale how?

    • Kraig says:

      Since it allows a verification that the owner does indeed authorise send transaction of voting. A coin or token can’t be copied and messages can be sent over a wallet. You know that the walet belongs to that person and you know that the sender had access to that wallet. The blockchain technology effectively solves the problems of validating e-signatures. So in this case it can allow bondholders to directly transfer between themselves and others without needing to have a signature validated by a German lawyer. Could also be used as a method of getting shareholder votes or director votes electronically. So a rather mundane but practical use of the technology.

      • Matt P says:

        Until they get hacked and stolen… which happens all of the time.

        • Kraig says:

          Signatures het forged and stolen all the time. Doesn’t stop us using them.

          ATM cards ans bank funds get hacked and stolen all the time.

          No one suggests these other practical applications should use the Bitcoin or eth or neo blockchain just the underlying technology

    • Petunia says:

      The bond sales on a blockchain create instant settlement. No more 3 day waits to finalize the transaction, no more 3 day waits to get access to the proceeds. You get irreversible instant settlement.

      I think irreversible settlement is a problem because it relies on the blockchain not being hackable and not having any software bugs. The good part is that it kill high frequency trading because the blockchain is too slow a mechanism to support HFT.

      • george mcduffee says:

        How will “irreversible instant settlement” effect the FX “last look” trading scam?

      • Pete Franklin says:

        Sorry Petunia, but no. You need to exchange (fiat) money. You need to check that that bond actually exists. And more (e.g., reverse erroneous trades). There is no “instant” settlement in ANY financial product except cash (electronic) payments. Btw, futures settle same-day, govvies T+1 and other nuances.
        Blockchain tech merely adds complexity to an already fairly complex but very “well-oiled” settlement system.

        Regarding your point about automated trading, is precisely the reason why players in the market have no reason to adopt blockchain. Nearly all financial products are traded by systems, so why would a system (blockchain) be used by the same people who trade?

  3. MC01 says:

    Telefonica Germany (or Telefonica Deutschland, or O2 Germany…) is a veritable M&A queen: those depressed share prices fully reflect about a decade of share dilution to finance the purchase of competitors ranging from E-Net to HansaNet.
    Like any good M&A queen, Telefonica is trying to discreetly unload some of all that dead weight they accumulated, partly for profit and partly because anti-trust organizations occasionally take a break from politics to do their job.
    Since a deal with Li Ka-shing of Hutchinson Whampoa fame to sell O2 fell through, Telefonica has been quietly working towards spinning the company off through an IPO.
    The O2 network in both Germany and the UK is completely integrated with Telefonica’s other activities, leading to some interesting questions such as how ownership of said networks will be split in case the IPO gets the go-ahead or, far less likely, another buyer is found.
    It will be also interesting to see what real assets O2 will really own or if this will be yet another case of a M&A queen dumping an ailing company loaded with debt upon investors driven insane by financial repression.

    • Maximus Minimus says:

      So Telefonica is like that other featured company InBev: the welfare queens of the beer business (and maker of huge volumes of what is in polite society called an animal product). It was saved from its M&A spree after the meltdown only by ultra low interest rates.

  4. put some Blockchain lipstick on that pig

  5. Pete Franklin says:

    Telefonica is toying with buy-and-hold private placements for a small tranche. Added costs to an already existing investor slice that works, at low cost. Blockchain tech in financial services is very, very far away. In the most obvious applications, like trade finance documentation where you need traceability, DLT still needs to get linked into many different systems along the way, while the existing system already works. Just adds a lot of costs to an already thin-margined business.
    I.e., there is no business case for blockchain. As Nick Kelly stated, problem looking for a solution.

Comments are closed.