BUSINESS OPINION:An injection of about €400m is needed – STT have to figure out if they would ever get it back

PRESSURE IS starting to mount on STT to decide what it is going to do about Eircom.

The Singapore-based group – which is owned by the city-states sovereign wealth fund Temasek – has been a model of eastern inscrutability since taking control of the national phone network at the start of last year.

They paid a mere €140 million for the company, but it came with an unsustainable debt mountain of €3.75 billion.

For the last year the Singaporeans have been sitting on the sidelines weighing up whether they want to roll up their sleeves and follow their €140 million with however much more money it is going to take to sort out Eircom.

The figure put on the amount of equity that needs to go into the company is about €400 million and, presumably, the question STT is trying to figure out is whether they will ever get it back.

One of the things they have been watching is how chief executive Paul Donovan has been getting on with his cost-cutting plans. The most recent advance on that front has been a deal that will see staff take a 10 per cent pay cut. Some 1,000 jobs are to go over the next two years.

The other variable which no doubt will be watched by STT is the performance of the Irish economy given the pretty direct link between economic activity and telecoms traffic.

There does appear to be a consensus that the economy will return to growth next year, albeit based on a two-speed economy.

The last consideration, and the one that has now come into very sharp focus, is when is the best time to move when it comes to trying to strike a deal with the company’s bondholders.

It would appear that time is running out in this regard, with management conceding on Friday that it may breach its financial covenants within three months. This would point to a deal sooner rather than later.

Donovan is clearly keen to get the job done, arguing on Friday that it “is imperative that we accelerate the discussions with our lenders and shareholders about how we manage a potential breach.

“We will need to put the company on a sustainable footing with regard to a future financial structure and that includes the amount of debt that we have on our balance sheet and the terms of that debt.”

The senior creditors also seem ready to go with advisory firm Houlihan Lokey signed up to represent them. Eircom has also got tooled up, engaging investment banks Gleacher Shacklock and JP Morgan, and law firm Linklaters to represent it in talks.

However, it might be rash to discount the possibility of STT playing for a little bit more time by just dribbling extra capital into Eircom to allow it avoid a breach of its bank covenants. Although some debt is due for repayment in June, the first really big tranche – of €1.2 billion – does not fall due until 2014.

Bank of America Merrill Lynch estimate about €25 million should do the trick and keep the company out of default until the end of the year. It must be tempting. The uncertainty about STT’s commitment has certainly helped Donovan drive through his cost-cutting and will ensure that they take hold.

Likewise the prospects for the economy should be a deal clearer come the end of the year.

The downside is that the longer STT prevaricates the worse the trading position at Eircom becomes. The latest set of figures indicate the difficulties the company is facing.

Group revenues fell 11 per cent to €407 million in the first quarter while adjusted Ebitda – earnings before interest, taxes, depreciation and amortisation – fell 6 per cent to €170 million.

Fixed-line revenues fell by 6 per cent while its mobile sales were 11 per cent lower.

The company shed 21,000 mobile customers in the nine months to end the period with 1.04 million subscribers.

The other problem facing Eircom is that its competitors – and NTL in particular – are currently investing in infrastructure and stealing a march on it, particularly in cable.

The worse the trading position the more likely the bondholders are to agree to a bigger haircut in the inevitable restructuring.

But, by the same token, there comes a point when so much damage will be done to the company and its prospects by the stand-off that it becomes counter-productive.

On balance it looks as though STT will bite the bullet sometime over the next three months but there is quite a game to be played out first.