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Telstra, PCCW settle Reach terms
SYDNEY, Australia (CNN) -- Australian telcom Telstra and its Hong Kong partner PCCW have agreed to buy more capacity from their beleaguered Reach joint venture under a refinancing agreement. Telstra and PCCW announced Monday they had settled on new terms with banks over a $1.5 billion loan facility for Reach, the undersea cable network they set up in 2000 as a 50-50 venture. Under the new deal, Telstra and PCCW will prepay $286 million -- $143 million each -- for network capacity, allowing Reach to repay $300 million of the loan principal and cutting its loan to $1.2 billion. The remaining principal repayments have been delayed until December 2010, when the balance will be due in full, Telstra said. Telstra and PCCW also committed to buying at least 90 percent of their international capacity needs from Reach until the loan is repaid. Telstra CEO Ziggy Switkowski said Monday the new arrangements gave Reach "financial flexibility," enabling a progressive return to better financial results. Telstra and PCCW have been negotiating for four months with the banking syndicate, led by JP Morgan Chase and Barclays, trying to win easier terms for Reach. The capacity prepayment deal had been largely expected, despite Switkowski saying on March 7 there was no proposal for Telstra and PCCW to pump more cash into Reach. (Full story) Other members of the banking syndicate are HSBC, Citibank, ANZ, CSFB, UBS Warburg, Rabobank, UFJ and Fortis. Reach is the largest international voice and data carrier in Asia, but like other carriers is confronted by falling prices stemming from a capacity glut in the market. Reach was formed in 2000 when Switkowski and PCCW's Richard Li struck a broad alliance that was hailed at the time as Telstra's entry ticket to Asia. But on February 21 this year, Telstra said it was writing down another $546 million of its investment in Reach, taking the carrying value down to zero. (Full story) PCCW said at the same time it was writing down its Reach stake by HK$8.26 billion ($1.05 billion), leaving it in its books at HK$3.964 billion ($508 million). Ratings agency Standard & Poor's said on Monday the Reach refinancing had no impact on Telstra's rating. It said the risks included Reach's revenues still being exposed to falling capacity prices; and the $286 million prepurchase agreement only being able to be used when Reach has surplus cash flow. Telstra closed 0.47 percent lower in Australia at A$4.22, compared with a 0.27 percent decline for the broader market. PCCW stock was down 1.1 percent to HK$4.50 in Hong Kong heading towards the close. The Hang Seng index was down 1.65 percent.
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