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My name is Logan Miller, and I am the head of European strategy here on the London side for Credit Sites. And today, I'm pleased to be joined by Mark Chapman, who is a senior analyst and is the head of telecom and media sectors for Europe alongside a host of other duties and responsibilities here at Credit Sites. But yeah, Mark, thank you so much for joining today. Thanks, Logan.
Excited to be on the podcast and to talk about telcos. Yeah, it's definitely an interesting space right now. I mean, coming into this year, we took quite a constructive view in terms of sector positioning within the telcos. Investors so far this year have been fraught with concerns about the macroeconomic environment, notably the implications of trade wars and tariffs with the U.S.
But I recall this time last year, European telecoms were really in the spotlight. We had some very high-level, high-profile blow-ups, most notably out of East France, but also other names like Telecolumbus and TocToc. But the sector, especially within IG, is at least trading inside of the index on a spread basis. So, Mark, how do you explain this and are valuations justified at these levels?
Yeah, I mean, I think to really understand European telcos, you have to look at a little bit of the history of the sector and kind of how we got here. I mean, really, since the advent of the 3G auctions in around 2001 and then the introduction of LLU on the fixed-line side in about 2004, the sector has really been under a lot of pressure as you've got more and more competition coming into the sector. And that created a really protracted down cycle, essentially, that ran through the end of 2019, in our view. So, you know, nearly 20 years of a lot of pain.
But in our view, the sector started to kind of turn around a little bit from 2019 and that turnaround was accelerated by the pull forward of demand from the pandemic and improved pricing power that came to higher inflation. While at the same time, we saw really a consensus across most players in Europe around 5G of the home as the technology of choice going forward, which gave kind of more visibility to investment plans for the strategy, for the operators to move forward with their strategies. So really, we see the sector as kind of on this turnaround story. But turnarounds happen, especially in an infrastructure-heavy sector like this, relatively slowly.
At the same time, you had a shift in the rates environment that happened really quickly, obviously, in 2022. And so there were some companies that fell on the kind of right side of it. They were able to turn around their business, get their balance sheets in order at companies like Vodafone, Telecom Italia, United Group. But then you had others that kind of fell on the wrong side of that.
They weren't able to turn around fast enough. And that's obviously your alt-pieces, your telephone numbers, your toll calls. And so really, because we see this kind of turnaround as building, we do think that it is justified to see the sector trading inside where it has done historically. But the kind of benefits of turnaround are unevenly spread across the sector.
Generally speaking, we see a shift towards incumbents and owners of fiber assets and away from the cable players and some of the more infrastructure-like resellers. The other kind of key trend in the market is kind of expanding the lens for competitive analysis, from focusing just on the retail sides to focusing both on the retail side and on the network side. And so when, going back to your question, on the IG side, most of the IG space in Europe is really on the winning side of that dynamic. They're most incumbents.
Most of them have quite a fiber-rich set of networks. And so we do view the relatively tighter spreads by historical standards as pretty fair. At the same time, as you intimated, this is a sector that's very, very well-insulated negligible exposure to tariffs or broader macro pressures. And really, the last piece of the puzzle is that we expect a little bit more limited supply this year than in previous years.
So we really see the sector as becoming more utility-like over time, and therefore, we see it as an attractive place for long-term focused credit investors. Yeah, that's really helpful. I guess, with interest rates coming down, it does feel like animal spirits are kind of in the early stages of, once again, brewing. But I'd be curious, Mark, when it comes to sort of an uncertain macro, and we're hearing a lot of companies on sort of the consumer industrial side delaying capex spending and capex plans, is this the same story for telecom?
Or are we actually seeing issuers kind of borrowers continuing to sort of invest in the sector? Yeah, I would say we're still seeing pretty high levels of capex. Most companies are actually pretty much near capex spending. But I would say that the risk associated with that capex is actually a bit lower than it has been historically, because the visibility on the return of that investment is a little bit higher with fiber than on some previous investments.
And then the other kind of crucial piece of it is that while spending right now is actually still quite high, there's light at the end of the tunnel. Now, for some companies, that tunnel's coming very soon. You know, the likes of Orange, the likes of Telefonica, these are companies that are kind of near the end of their sort of peak capex cycle. So they should see declines as soon as 2026.
But then for other companies like, let's say, BT or Georgia Telecom, you can still look through it, but you can kind of see it coming to an end at some point in the distant future. So I think that's kind of from the perspective of investors to de-risk a lot of the capex that is still associated with the sector. And then I guess on the other kind of big financing topic is around consolidation and M&A, which, you know, the telcos historically seem to be, you know, big sort of spenders on M&A. But, you know, consolidation does seem like it's still a big key theme in the space.
So what's driving that? I guess how far will that all go? Yeah, I mean, this is definitely a very important, maybe the important question at the moment. And in fact, even in the last couple of days, we've seen more speculation about a potential deal in Spain where the two big players, Telefonica and Massa Orange, are considering looking at Vodafone in Spain, which would essentially take the market down to just two very large players and one small challenger.
So, you know, there's definitely a lot of speculation and discussion at the moment. Really, what this stems from is that in that long kind of down cycle that I was talking about for the sector, the only kind of surefire way to get a great return was in-market consolidation. You know, nine times out of ten, this is a great way to generate a return on investment. You get a lot of synergies.
You also, despite what you might tell the regulators, tend to have a lot better pricing power and you can raise prices quite significantly. And so because of that, it is definitely the thing that investors love to see. Now, there's been quite a lot of change at the EU level in recent years, particularly with the JARGI report coming out and intimating that there would be more support for consolidation. You also have to change in personnel at the commission.
And so whenever you get this change happening, there's a potential window in which perhaps the old rubric may not apply. And so you want to test what new rubric is. And so I think there's a really strong impetus for people to at least make an attempt. Will it actually work?
That remains to be seen. But we do think that, you know, there's more appetite to try their luck because if you can really get four to three players in the market, you can generate a really strong return for investors. So we expect to see some pretty serious attempts. You know, France and Italy are the obvious cases here where we could see momentum build behind bids there.
We're already seeing activity in Romania and speculation in Spain. And we could see this expand further into markets like Germany and Poland. So it's definitely something that we'll be watching. I think actual deals closing in 2025 is very unlikely, except for potentially Romania.
But it could support sentiment this year and sort of pave the way for a better outlook next year. So generally, we view it as pretty positive because this type of M&A tends to bring big synergies. There can be supply associated with it, but that's likely to be a little bit further in the future. So in the short term, it's kind of more positives than negatives, we would say.
Yeah, that's really helpful. And I guess we'll talk a little bit about supply later on the podcast. But, you know, one question we often get in strategy is kind of which markets within Europe we like and then where we think investors should have a bit more caution. But I think this is particularly of interest in the telecom space where evidently, you know, different markets have different dynamics.
So I guess, Mark, which markets are you in favor of? Which ones do you like? And then on the opposite side of that, which areas do you have these thoughts and concern? Yeah, that's a great question.
I mean, telecoms, the sort of adage I would say for these European telecoms is that your revenues are local, but a lot of your costs are a bit more global and there's sort of cuts across. And so generally speaking, you know, telcos in more benign competitive environments and ones where the customer has a higher capacity to spend have a big advantage because they have higher revenues per customer, but they also have some of the same globalized costs when it comes to buying equipment and the like. So generally speaking, the rubric is more consolidated, wealthier markets tend to be a lot more attractive. But the key thing in terms of if you're actually investing is what are the markets that are changing?
You know, who was tough and is becoming better or has been good and is becoming more challenging? And that's where we really focus all over. And so there's markets like Spain and Italy, which have been very challenging for a long time, but really there's little sign that those are getting worse. In fact, if anything, they seem to be improving a little bit.
So there's a little bit of a turnaround story in those markets, which is good to see. We've also been generally quite optimistic on France as this market we see is in a relatively stable equilibrium. That's been a bit more challenging in the last couple of quarters, especially the last few months, but it's still a market where we think that people kind of exaggerate how challenging it is. The ones where we're most constructive is probably the likes of the Netherlands, Switzerland, the Nordics, as I say, they're fairly wealthy areas and pretty concentrated markets.
And we're cautious on markets like Portugal and Belgium, where you've got new entrants coming in in the form of Digi. But we really think that's more of a concern for 26 than it is for 2025. But the two markets that I think you've got a bit of a different view from people more generally is really around Germany. We are starting to see more people concerned here, but we've been concerned about Germany for a little while now.
The core issue there is really that in Vodafone, you've had this company that sort of transformed themselves in recent years and so inadvertently perhaps transformed themselves into an underachieving German telco, which obviously is in a very inspiring market position to be in. And so they really face pressure to kind of get their act together and do something about that. And that creates risks in the market that they kind of unsettle what has been a pretty stable asset apple cart historically. The other key market to watch is really the UK.
This is a bit of an inflection point. In the short term, so 2025, 2026, it's pretty positive. You've got consolidation on the mobile side, which should sort of make it easier for mobile operators. You've got the value player, TalkTalk, kind of pulling back from the market, which should reduce competition on the broadband side.
But the key question is that the altnets, so these are people who are rolling out their own fiber networks, they're reaching scale here. And if they continue to see further acceleration in their growth, then they could reach a level where they are more sustainable going forward. And that would make the UK go a much tougher market longer term because you'll get a lot more network-based competition than you've had historically. Yeah, so it sounds like a lot of kind of moving parts, love to digest in terms of country-specific exposures and different themes going on.
But I guess from an investor standpoint, one thing that was obviously near and dear to our role is kind of looking at the new issue pipeline and considerations around that. Oftentimes, that's the easiest way for investors to really pick up liquidity and also decide whether or not they want to be active or less active in a certain sector. But this year, we've obviously seen very robust supply across Euro IG. I think May was effectively a record month of corporate bond issuance in Europe.
And it seems like almost every issuer has been taking full advantage of positive market sentiment and issuing new bonds, kind of rolling over upcoming maturities. And we've seen even issuers outside the US really trying to take full advantage of the cheaper, I guess you can call it the cheap, relatively expensive cost of a new issu debt. But in telcos, I guess, what are some of the themes that we've seen so far this year? You know, you mentioned potential consolidations of supply around that, but what are you thinking about in terms of supply and the outlook going forward for telcos?
Yeah, I mean, interestingly, I mean, it has not really been the main driver of supply so far. That's really to do with the timing, I think, in that there's still discussion around it before you actually get the supply coming through. So we've actually kind of went into this year with, I would say, fairly modest expectations for supply. And as you said, the new issue market in IG has been pretty hot.
And so we're tracking a little bit ahead of what we thought we would be with a bit over 10 billion of supply year-to-date on the IG side. But that's probably a decent way towards what we expect for the full year, which is around 15 to 18 billion of supply. So we're kind of, I would say, probably two-thirds of the way through. So we could have a bit of a lighter second half of the year.
And on the high-yield side, you know, last year, we saw 14.2 billion of supply from high-yield telcos. So it was really quite material. This year, we've only seen about 1.7 billion. So it's been really very limited.
And we expect supply is likely to remain pretty limited this year. At the same time, actually, we have several companies that are actually extracting debt from the market, basically because they've sold assets and they're using that to tender for debt. And so we've seen supply taken out from the likes of Vodafone, Telecom Italia, Mass Orange, potentially Vodafone in Spain. And then on the high-yield side, we also see supply kind of coming out of the market for less good reasons.
Obviously, you have SFR, which is a very big issue of going through restructuring that will see significant haircuts to its reduction in the amount of debt that's outstanding. So when you're looking at it from a net supply perspective, much of you think net supply is likely to be really quite low on the IG side and very low, potentially even negative on the high-yield side. So we think that there's quite a strong technical support for this sector, at least in the next sort of 6 to 12 months. If we do get consolidation, that could lead to quite a bit of new supply kind of 12 to 18 months from now, but that would likely come with positive fundamental momentum.
The question around the US issuers is a big theme, and that's an interesting thing to watch because you've got players like AT&T and Verizon and Comcast that have been really quite absent from the market in recent years but have sort of reached the end of the leveraging processes to a certain degree, and so we could still see a bit more supply from them going forward. So we're seeing a bit of a change in the mix for your assets as well. So I guess another question I have on that is telcos are fairly sizable, historically sizable issuers of hybrids. Are you seeing anything in the hybrid space that looks interesting in terms of new issuance or companies calling hybrids that are already outstanding?
Yeah, I mean, telcos have definitely been big hybrid issuers, and one of the key questions, I would say, especially in 2022 and maybe early 2023, is what their behavior would be as regards to hybrids, but really what I think has been noticeable is that there's been very little change. Telcos have continued to call all of their hybrids at the first call. The ones who have issued hybrids have more or less continued to do so, and so it's very much business as usual in that space, which has added to, I think, a bit of support for the hybrids because of that predictability. It's a way to pick up some excess spread, but the spread to senior is pretty tight by historical standards, perhaps because there hasn't been much net news about.
has just been refinancing and as some of the bigger issuers like Vodafone for example sort of shrink their balance sheets to a certain degree you could see a reduction uh overall in the amount of uh supply from telecoms out there the key question in the hybrid space uh is really telephonica telephonica is a very big issue of hybrids by far the biggest in the telecom space and they're undergoing a big strategic review in the second half of this year that they could lead to some pretty significant changes so they're a bit of a wild card not so much for this year but perhaps into next year if they start to realize some of their bigger ambitions we could see a really quite meaningful supply of hybrids but that's still very much to be seen at this stage yeah i think um it's interesting this year just looking at kind of returns across the european market you know hybrids continue to sort of outperform and that you know that bid for risk very much remains intact it feels like so uh yeah we just continue to see spreads go tighter i mean we've been kind of cautious on the market overall a bit cautious on risk but you know the market seems to be being heavily dominated by those supply and demand technicals that you alluded to mark of really just not a whole lot of net supply you know adding new bonds to the market and so i think you know every time we i feel like a broken record on our on our monday's monday calls but you know it seems like spreads just continue to grind tighter but um you know it does feel like we're sort of getting you know with spreads where they are today in very tight levels i think trying to generate alpha is becoming increasingly difficult but you know certainly i think credit selections going to remain the key theme you know for the second half of this year just given that uh tariffs are coming back online likely in july we have we're not really sure how you know current talks are going but um you know again i think i think investors should be probably pretty keenly focused on owning companies they like and avoiding ones that are a bit on the hairier side so in our kind of final segment here mark let's let's kind of dive into you know the picks and pans what are some of the issues that you that you like at this point in time and what are some of the ones that you you know recommend investors sort of avoid right now yeah i mean well as we've talked about uh throughout the progress overall this is a sector that we quite like and uh we really like it because we of its more defensive credentials essentially and so with that in mind i would say in this sector i would like a mix of credits and we do like to have a decent position a bit of overweight and some of the ones that we see as more defensive the likes of orange uh which is one of our top pick in ig you know it is quite tight but it's very very defensive it's very very insulated from pretty much any of the risks that are likely to be top of mind for investors so um this kind of type for a reason and then we would pair that with some of the wider names in the space we're happy with a mix so like so ck hutchinson uh some teleconica seniors maybe some bt hybrids and really we think that it is a sector where you can reach for a little bit of deal the only name where we're really quite cautious on the ig side is for the phone where we think that even there the technical support in the near term is quite decent uh because they've stabilized the ship a little bit and they may well do another round of liability management exercises but they're kind of coming towards the end of that and they haven't really solved their kind of bigger term strategic issues so that's the that's the only name that we're really quite cautious on at the moment at the same time we think that you can dip down into into high yield a little bit into the double b space and looking for some potential rising stars not likely at all to be rising stars in 2025 but potentially in 2026 or early 2027 for the likes of telecom italia mass orange and possibly even some of the uh opco bonds at iliad we like the longer dated opco bonds so that's the ones uh maturing after 2029 so we think that that's another way to to pick up a little bit more uh spread for people who tend to be a bit more ig focused and then you know given how tight spreads are we're a bit cautious on some of the most uh sort of distressed and dislocated names you know particularly uh lts international that the junior that they're uh we're cautious on as well as tight credits uh where you could see a significant further supply the likes of uh manhole insult or aircon but generally speaking uh we did that in the sort of core of the market in that uh double b single b space uh there's still pretty decent value on offer and so um around a kind of mix of credits and it's where we feel most comfortable with a little bit of a bias towards telecoms over cable operators and generally speaking great that's really helpful and i think you know you did a great job kind of covering the comprehensive outlook and also trying to you know give investors some opportunities and ideas to put money to work clearly the inflows continue to pour in the door for european ig investors but this is really really helpful mark uh thank you so much for joining today and for those who are listening and have questions for mark i would highly recommend uh using the ask an analyst function on the website for specific follow-up questions you might have for mark otherwise uh thanks mark for so much for joining thanks elgan and thank you for listening credit sites disclaimer all price references correspond to the date of this recording this podcast should not be copied or distributed or reproduced in whole board in part and a credit site to nor its affiliates makes any representation or warranty as to the accuracy or completeness of any information contained in this podcast credit sites is not providing investment legal 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