High rates to hurt Magyar Telekom?

Authorities announced today that Hungary is preparing a financial aid package worth up to 600 billion forints ($3 billion, 2.3 billion euros) to boost domestic banks’ capital and help them refinance debts.  The aid package for “Hungarian banks of systemic importance” comes as part of the $25.1 billion standby loan for Hungary announced last month by the International Monetary Fund (IMF), the European Union and the World Bank.  The AP reports that “one of the risk factors for Hungary’s banking sector is the large proportion of loans given to home buyers and businesses in foreign currencies, especially in Swiss francs and euros.  With the forint’s exchange rate weakening drastically amid wide fluctuations, the risk that borrowers could default on repayments has increased.”  Fears that it would be unable to make debt payments and poor market liquidity caused the forint to temporarily lose some 40 percent of its value last month as shares on the Budapest Stock Exchange dropped to four-year lows.

The news has been particularly troubling for Magyar Telekom (NYSE: MTA), the country’s largest full-service provider of telecommunication services, which now trades some 40% off its 52-week peak.  Such a price may be appetizing to some punters, especially given the firm’s hefty dividend yield of 13.6% in 2007 and a habitually flexible balance sheet that affirms management’s stated goal to expand operations into neighboring Ukraine, Kosovo, and Bosnia.  But the IIR group, an independent research service, recommends caution, citing “intensified competition” in the mobile sector, and sluggish revenue growth in its fixed line services segment.

Moreover, when the Hungarian central bank (NBH) hiked interest rates by 300 basis points to 11.50% last month to defend the forint, Wood & Co., an analyst group, pointed out that the rate increase ate into the firm’s dividend yield, making it less attractive.  Additionally, the company’s debt, highest among the nation’s telecommunication firms on net debt/equity of 34%, is 90% in local currency, meaning that higher rates would inflict further pressure on profits and possibly reduce net income in 2009 by 6.9%.