BusinessCorporate FinanceTelecoms giants leave £40bn debt off balance sheet

Telecoms giants leave £40bn debt off balance sheet

Credit ratings group adds £40bn of debt to European telecoms companies' balance sheets by using one-size-fits-all calculation of liabilities

A credit ratings group has added 61bn euros (£41.4bn) to the 250bn euros
reported as debt by Europe’s seven largest telecom companies in 2006 after using
a one-size-fits-all method to calculate balance sheet liabilities. Adjustment
for off-balance sheet leased assets accounts for 80% of the amount added to
debt, according to a report by
Investor Service

Currently, companies only have to report what they consider to be finance
leases on their balance sheet while operational leases can be left off, which
creates sizeable scope for divergence.

Data showed that, under Moody’s methodologies, BT would have had more than
8bn euros of debt added if operating leases had appeared on its balance sheet.
Vodafone would have reported an extra 7bn euros.

Moody’s accounting specialist and senior credit officer, Trevor Pijper, a
qualified accountant formerly employed at Ernst & Young and KPMG,
highlighted the slow progress of the IASB in addressing the accounting for
leases. However, he said it would be quite a considerable move for them to put
all these liabilities on the balance sheet.

‘In the meantime, we have taken these steps because we want to get the
numbers as comparable as possible, and get the metrics we’re using reflecting
the underlying economics,’ he said.

Analysis of the annual reports of the seven operators revealed several
accounting differences of ‘varying magnitude and significance’. Moody’s stated
there was little consistency in the items included in (and excluded from)
EBITDA, debt and net debt, which the ratings experts expected as there are ‘no
standard definitions for these key measures’.

Reporting of derivatives that affect interest expense and the choice of
accounting method for jointly controlled entities also came in for criticism.
Because IFRS does not prescribe a single method of accounting for pension costs
and investments in jointly controlled entities, where corporates can use
proportionate consolidation or equity accounting, Moody’s believed it was
‘inevitable’ that different methods would be used in practice. ‘The IASB has not
prescribed a single method – they’ve left it open for companies.’

Pijper added: ‘These figures are used in the capital markets and in a way
it’s unfortunate we don’t have standardisation. These accounting differences
make it harder to compute credit metrics on a comparable basis.

‘We’ve gone ahead of the game in that we’re not waiting for the standard
setter when it comes to leases. We’re trying to kill two birds with one stone by
making the accounting more comparable and more in line with the underlying

Company reports

Iris sold to create £500m software group

Accountancy software company Iris has been sold as part of the formation of a
new £500m IT group. Iris, which recently announced it was up for sale after
months of speculation about its future, has been sold by owners Hg Capital to
Hellman & Friedman (H&F). H&F has created an enlarged business by
merging Iris with another UK company, Computer Software Group. The group, which
cost H&F £500m, has combined revenues of £100m and will operate under the
Iris Software Group brand. Iris chief executive Martin Leuw will be the group
chief executive of the enlarged business. Computer Software Group is strong in
the law profession, and Hg Capital will remain a ‘significant shareholder’ in
the group. ‘It is excellent news for our customers as it significantly expands
our research and development capabilities and service infrastructure, as well as
providing tremendous scope for career opportunities for our employees,’ said
Leuw. He led a £102m MBO of Iris with funding from Hg Capital in July 2004. The
group would not reveal how much H&F has paid for Iris, although previous
estimates suggested Iris was up for sale at about £250m.

London’s AIM is full of eastern promise

London’s Alternative Investment Market is benefiting from an influx of
Bollywood film companies. Three companies operating in the world’s most
industrious film industry ­ which releases more than 1,000productions a year ­
have taken up, or are in the final stages of, an AIM listing. The latest,
Pyramid Saimira Theatres, is mulling a $150m (£76m) fundraising deal through the
listing of a production and distribution unit in London. The other two Bollywood
companies to hit AIM in the past three months were the Indian Film Company,
which closed a £55m IPO last week, and UTV Motion Pictures, which is fine-tuning
an $80m fundraising attempt.

Marks & Spencer FD reaps recovery bonus

Ian Dyson, finance director of Marks & Spencer, has been paid a cash
bonus of £525,000, taking his overall pay past the £1m mark. Dyson, along with
other senior executives, was rewarded for improving the fortunes of the once
struggling high street retail store. Its most recent results showed a 29% rise
in pretax profits to £965m as sales increased by 10% to £8.6bn. His pay, though,
was dwarfed by that of chief executive Stuart Rose, who took home £3.6m in
salary and bonus last year. M&S requires executive directors to take 60% of
their bonuses in shares.

Hollinger auditor “not surprised”

Patrick Ryan, the auditor who headed the Hollinger account at KPMG, has
testified at the lack of surprise shown by the head of Hollinger International
audit committee, when he was told that Conrad Black and other executives made
$15m (£7.5m) on company asset sales. When asked by defense attorney Ronald S
Safer if the former Governor of Illinois James R Thompson (Hollinger audit
committee chairman at the time) ‘fell off his chair’ when told of the payments
to Black and others, Ryan said he did not and had ‘remained upright’. Safer was
hoping to convince jurors that the head of the watchdog committee was already
well aware of the payments, which prosecutors claim Black and other executives
slipped past the newspaper company’s board.

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