THE PRICE of debts issued by subsidiaries of Eircom fell yesterday amid concern that the company may breach loan covenants.

The €350 million floating-rate notes of ERC Ireland Finance Ltd fell to a record low at 37 per cent of face value, according to Royal Bank of Scotland.

The second-lien loans of ERC Ireland Holdings Ltd were quoted at 70 per cent of face value, down from 73.5 last week, according to Mizuho Financial Group.

The company’s senior loans were quoted at between 77 per cent and 79 per cent of face value yesterday, compared with 80 per cent from last week, according to Cantor Fitzgerald.

“The market is telling the company and their bankers how much spread Eircom’s debt should be paying to reflect the credit’s risk,” said Alex Moss, a fund manager at Insight Investment Management in London.

At current prices, investors are indicating the company would need to increase the interest margin on the senior loans to at least 6 percentage points over benchmark rates, from about 2 percentage points, if it wants to amend conditions of its debt, said Mr Moss.

In January, Standard and Poor’s said Eircom group may breach debt covenant in about a year. SP expects investors in the second-lien loans to recover less than 30 per cent of face value, while the floating-rate notes may get less than 10 per cent in the event of a payment default.

In May, Moody’s Investors Service cut the rating of the telecoms group’s €3.3 billion senior secured loans by one level to four steps below investment grade at B1. The €350 million of second-lien debt due in 2016 was cut to Caa1, seven rungs below investment grade, after the company’s operating performance weakened amid intensifying competition.

Eircom has been cutting capital expenditure to help generate positive cash flow, Moody’s said. If it continues cutting spending, it may lose market shares to its rivals Vodafone and O2, Moody’s said. – (Bloomberg)