SPAIN’S TELEFONICA plans to swap €2 billion in preferred shares for bonds and treasury stock, a move that will help the debt-ridden Spanish phone company lower financing costs.

The carrier offered to buy the securities at 100 per cent of nominal value in cash, it said yesterday. The offer by Europe’s most indebted phone operator is conditional upon investors using the money they receive to buy newly issued bonds and shares held as treasury stock.

The preferred shares count as liabilities on Telefonica’s balance sheet. Chief executive Cesar Alierta is reversing a decade-long expansion strategy by selling assets to avoid a reduction of debt ratings.

The exchange of preferred shares into common stock will reduce the debt showing up on Madrid-based Telefonica’s balance sheet and help boost capital, said Francisco Salvador, a strategist at FGA/MG Valores.

“This move will help Telefonica to continue improving its financial structure as it will be able to reduce its debt,” he said. “The swap will also allow the company to cut its financing costs.”

If all preference shareholders accept the offer, about 40 per cent of the total will go into treasury shares and 60 per cent into new bonds.

The deal will help Telefonica cut €800 million of debt.

“If fully tendered, the group will both lower its interest charge and optically reduce its leverage as these preferential shares did not quite qualify as equity either under GAAP accounting rules or for rating agencies,” said Henri Alexaline, a fixed-income investor who helps manage $1 billion at London-based FM Capital Partners.

“It’s a natural step toward optimising the balance sheet which the market should welcome.”

Telefonica added 0.2 per cent to €10.18 yesterday morning in Madrid . The stock has declined 24 per cent this year, compared with an 8.5 per cent decline in Spain’s benchmark IBEX 35 index.

The company, which raised €1.45 billion this week selling shares in its German unit, has cancelled its dividend and a share buyback plan for this year. As it struggles to reduce more than €58 billion of debt, Telefonica also plans to spin off its Latin American business. – (Bloomberg)