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TalkTalk’s growing debt pile: What it means if you’re a TalkTalk customer

Wednesday, January 11th 2017 by Dan Howdle
Yesterday, it was reported in several notable publications that TalkTalk is seeking to borrow £300m to pay back its bank lenders. It plans to raise the cash by issuing high-yield corporate bonds with a redemption date set for 2022. So what does that mean exactly?

Let’s start with the basics: Both the government and corporations (or public limited companies) issue bonds as a way of raising cash when they need to. Bonds are sold at a nominal value (£100), with a promise to pay a certain amount of interest to the bearer at six-monthly periods up to the redemption date, at which point they are reclaimed by the issuer at their nominal value.

Imagine it like selling seeds. Buyers get to grow the trees and harvest the fruit for a set length of time, trade the tree if they want to, or sell it back to the issuer once the tree reaches maturity.

During the period between issue and redemption, bonds may be traded at above or below their nominal value depending on market forces, such as creditworthiness of the issuer (TalkTalk), risk the issuer might default, interest rates and inflation. Or, to use the tree analogy again, depending on what sort of health the tree is in – are its leaves nice and shiny? What’s the weather like? Is it growing as expected or is it stunted and/or lopsided?

These are ‘high-yield’ bonds, which TalkTalk would only issue if confidence in the company was particularly low. TalkTalk bonds are going to be a risky buy, so a higher return is set to tempt buyers in. These are not the moves of a company that has confidence in itself or its future.

TalkTalk currently owes £847m. Of this, the £300m it intends to raise through the issue of bonds is to pay off its immediate creditor debt, the remainder of which has to be paid off by 2019.

It’s hardly surprising then that TalkTalk’s balance sheet is coming under the intense scrutiny of its investors. In the first half of this year alone TalkTalk’s net debt increased by £168m – leaving it with a profit ratio of just 2.8%. And this would have been substantially worse had TalkTalk not held off on a much-needed marketing spend just so it could report a positive number.

TalkTalk has suffered a lot recently, mainly by its own hand. It repeatedly failed to put the necessary protections in place to protect its customers’ data throughout 2015, lost some 100,000 of its customer base in the process, and continues to maintain a very low-end customer service reputation.

BT, Sky and Virgin on the other hand are nailing TalkTalk to the wall with their more competent service, better digital TV bundles and marketing and infrastructural investment budgets designed with growth in mind.

TalkTalk’s answer to its immediate woes really is a case of robbing Peter to pay Paul – to pay off one debt now at the cost of taking on another that’s both costlier and more destabilising. And its plan to increase profit by spending less is totally barmy – you need to speculate to accumulate, and what TalkTalk needs in 2017 is a huge marketing drive to tempt a throng of customers across from its competitors.

Instead, it is downsizing its marketing effort, borrowing more expensively and investing less in its own future.

The writing is on the wall. If I were a TalkTalk customer, to be on the safe side I would want to get out now…

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