France Télécom pins hopes on state

Credit rating agencies predict government bail-out.

Hopes were growing yesterday that the French government will bail out France Télécom, the heavily indebted communications group which owns British internet service provider Freeserve and a majority stake in mobile phone group Orange.

Shares in the company have risen by 50% this week on the Paris bourse as analysts predict that the government, which owns just over 55% of France Télécom, will have to prop up the business.

France Télécom, chaired by pillar of the French business establishment Michel Bon, is tottering under €61bn (£41bn) of debt built up during a huge acquisition spree. Its plans to cut its debts by selling non-core assets have been queried by analysts who are unsure whether buyers will emerge in the current volatile market.

France Télécom's shares have lost more than 70% of their value over the past six months, wiping out any hope that the company will be able to raise money by issuing more stock. The credit rating agencies have also downgraded the company's bonds to just above junk status, effectively closing the capital markets to any further fundraising without the government's backing.

Ratings agency Fitch yesterday sliced its long-term rating on the company to just one notch above junk, following a similar move by Moody's and Standard & Poor's last week.

Fitch said the only reason that France Télécom had retained its investment-grade rating was the "strong likelihood" that the French government would help the company out of its financial hole.

"These current ratings therefore explicitly assume French government support," the agency said.

This week there was intense speculation that the French government would go the whole way and renationalise the company.

On Tuesday industry minister Nicole Fontaine denied that the government planned to buy back the business, but gave her wholehearted sup port to the France Télécom board.

Analysts in Paris believe that the government might decide to guarantee a new France Télécom bond issue, effectively bankrolling the business. Any such move is likely to be heavily scrutinised by the European Union under its rules against state aid.

· WorldCom, the US telecom group subject to investigation by the US authorities over a $3.8bn fraud, is understood to be considering asking its bondholders and banks to swap their $33bn debt for shares in the company. This week the company's senior management admitted that it was considering a range of refinancing proposals.