Cost of borrowed capital

The cost of borrowed capital reflects the interest rate for medium and long term debt financing. Since 2001, PTC has used the rate of the medium and long term loan contracted in 2000 from PT SGPS. From 2005, and given that the loan was repaid in 2004, the rate of borrowed capital was determined using the average of several packages of medium and long term PTC debt.

It should be noted that the debt premium implicit in the average rate of borrowed capital used by PTC from 2004 to 2007 has a value which is clearly below the 1.3% average of the values adopted by European regulators mentioned by PwC ¹.

As mentioned above with respect to gearing, PTC does not hold medium and long term loans on an ongoing basis. In this sense, PwC recommends that the rate of borrowed capital is determined taking into account the debt premium ².

Since PTC does not issue bonds, one could consider the debt premium corresponding to PT SGPS. It should be noted, however, that to consider only the debt premium of PT SGPS would equate PTC to PT SGPS with respect to the rating assigned to the companies.  This could prove to be inconsistent, since these businesses have different levels of risk, taking into account the individual capital structure and businesses.

Because there is no value which enables PTC's debt premium to be measured directly, and bearing in mind that the methodology used for assessing other parameters such as the gearing and Beta was based on a Benchmark encompassing the same comparable companies ³, this methodology is also deemed suitable for determining the debt premium ⁴. As was the case in the determination of other parameters that make up the cost of capital, PT SGPS was also considered in the sample of comparable companies.

The choice of the maturity and duration of the series should be consistent with the choice made with respect to the risk-free interest rate while taking into account that the rate of borrowed capital is obtained from the sum of the risk-free interest rate and the debt premium. Therefore, a 10 year maturity will be used and a 2 year data series (January 2007 to December 2008), resulting in a value of 0.99% for the debt premium (See Table 10).

Source: PwC 2009 Report and Bloomberg

However, to provide a more consistent result, and since in the past PTC has been financed by its sole shareholder (PT SGPS), consideration was also given to the debt premium which results from the database of  Bloomberg ⁵ (another source of information recommended by PwC) which reflects those telecommunications companies with a BBB rating (identical to the current rating PT SGPS). Considering the data series of the last two years (January 2007 to December 2008), this value is determined at 1.48%.

In light of the above, ICP-ANACOM determines that both sources of information: (i) Credit Default Swap Spreads for comparable companies with issuance of 10 year bonds, and (ii) the implicit spread for telecommunications companies with BBB implicit, should be used to determine the debt premium of PTC. For both sources of information a history of two years should be used, determining a value of 1.23%, which corresponds to the arithmetic average of the two sources of information detailed above.