The state-owned Telekom Serbia is planning a €500 million bond issue, with company CEO Vladimir Lucic saying the new funding would allow them to "react quickly to any new acquisition opportunities in the region," state news agency Tanjug reported on Thursday.

Lucic told the pro-government Tanjug news agency that some of the money from the issue will be used to develop infrastructure and expand.  He added that preparations for the issue would be completed by May.

Reuters quoted him as saying that the issue will most likely be in Luxembourg or Frankfurt, with the timing of the issue “dependent on the assessment of when the stock exchange will work best in the context of the crisis in Ukraine.”

He said that the company expected to net a profit of 17 billion dinars (€144 million) in 2022, or 30 percent up from 2021. Euronews reported Lucic as saying that the demand for the bond is expected to exceed the €500 million.

Telekom Serbia operates cable and mobile services in Serbia, Bosnia-Herzegovina, Montenegro, Austria, and North Macedonia, and reportedly has more than 11 million users combined. It also holds a majority stake in Bosnia’s second-largest telecom Telekom Srpske, and also controls the mobile network M:Tel in Montenegro.

Belgrade daily Danas said that a special meeting of Telekom shareholders has been called to discuss the details of the future Eurobond issue, including the selection of stock exchange for the issue, its due date, price, and interest rate. The daily said that the preparations include getting credit ratings from Moody and Standard & Poors agencies.

It quoted Lucic as saying that Telekom Serbia has plans to offer new mobile phone services in North Macedonia, Switzerland, and Germany, with a view to doing the same in the United States and Canada. According to Danas, Lucic did not disclose the size of the company’s debt at the end of 2021, which is thought to be a key element in determining its credit rating and consequentially the Eurobond yield.

Telekom Serbia launched an investment expansion in 2018 when it bought a number of small cable operators in Serbia, at prices that experts said were excessive, raising its debt to some 150 billion dinars (€1.3 million) at the end of 2020. The company also pledged to pay €600 million over the next six years for TV broadcasting rights for England’s Premier League. Some experts are now saying that the Eurobond issue could be used to cover some of that expense.

The company also expects to increase its subscriber count by 30 percent, from 1.0 to 1.3 million, in Serbia alone, Danas said.

It quoted Lucic as saying that Telekom’s revenues in Serbia increased by €130 million, or 17 percent from 2021, although it is unclear what period the daily was referring to. The company’s financial report for 2021 has not been published yet, but Lucic told Danas that profits in 2021 totaled 13 billion dinars (€110 million).

Securities broker, Nenad Gujanicic, said that the high level of debt that Telekom has cannot be reduced quickly, adding that it currently stands at 140-150 billion dinars (€1.2-1.3 billion) “if no large repayment was made last year.” He warned of problems in maintaining stable financial structure given the expected rise in interest rates.

“I believe that they want to issue long-term bonds to maintain financial stability, despite investing in a 5G network but with that level of debt the interest rates will be very high,” he told Danas, although he added that he saw no problem in Telekom getting the money it needed. He said the problem lies in the long-term servicing of the debt with rising interest rates, for a company that mainly operates locally and is unable to increase prices because the population’s purchasing power on their home market is low.

“Add to that the way the company is managed, the (political) party oversight board, and things do not look good for shareholders or creditors and bond buyers – which means the cost of new debt could be high,” Gujanicic said.

Kragujevac University economics Professor Veroljub Dugalic said that the Eurobond issue is a common practice globally, but represents a precedent in Serbia. He said the bond issue is a better option than taking out a simple loan – but warned that the company has to be solvent once maturity date arrives. He expressed concern that the piling debt could later be shouldered by Serbian taxpayers if Telekom runs into problems which would prevent it from paying out bondholders.

Telekom Serbia issued dinar-denominated corporate bonds two years ago in the early days of the coronavirus pandemic. These corporate bonds were worth €200 million, with a five-year maturity date, and an interest rate of 3.97 percent. These bonds were bought up by local banks. A portion was bought by the Serbian central bank later on, which analysts described as essentially a way for the government to finance state companies from its primary monetary emission.

Danas said that Telekom did not respond to its request for comments on the Eurobond issue.

(€1 = 118 dinars)