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  • Interest rate pressures

Interest rate pressures

Telecom companies are, along with other large-scale industries like utilities and oil companies, perceived to be especially vulnerable to rising interest rates. Rising rates would be particularly painful for telecoms’ coming, capital-heavy investments, like 5G networks.

In the 2018 Telecom Risk Factor Survey, 66.7% of telecoms identify interest rates as a risk that could affect their businesses adversely. 

Many telecom companies are under pressure from both falling revenue per customer and debt loads. For many, the latter show few signs of diminishing, as increased competition and the continued emergence of new technologies create the need for fresh investments. Changes in interest rates could put further pressure on many telecoms who are increasingly forced to manage cashflow in accordance with on-going developments. Interest rate changes can also have a significant impact on telecoms’ stocks. Along with the utilities and oil companies mentioned above, telecoms’ stocks are generally treated similarly to bonds by investors due to their high dividend yield. If interest rates rise, new issues will have a greater payout and be more attractive to investors.

While the global economy generally remains strong, the World Bank issued a warning in the early part of 2018 that interest rates could be about to rise a lot quicker than expected. 

That would be doubly bad news for telecoms, as rising rates could hamper their ability to borrow funds to fund expansion and invest in new technologies and services, as the risks associated with increased competition and new competitors keeps growing.

Interestingly, while this remains a concern for telecoms, there has been a drastic improvement in sentiment with the drop of this risk from 93% in 2017. Telecoms in the APAC and Americas regions particularly feel this risk (83.3% and 81.3% of companies, respectively). In comparison, 59.4% of EMEA telecoms companies identify interest rates as a risk.

Quote/Viewpoint:

“Telecoms stocks are closely tied to interest rates, so any volatility in rates will have a swift, often painful, effect. Traditional steady and predictable growth rates are also under pressure. Tough decisions remain for many telecoms if interest rates rise. It may lead to divesting non-core business to secure and manage cash flow. Classic tools for mitigating the effects of interest rate fluctuations like swaps and fixed-rate borrowing may well fall outside the remit of most risk managers, but they would do well to strike a close partnership with credit managers to mitigate these risks.”

Christian Goetz