New trends in telecoms technology and the accompanying need for financing means that the sector is far from saturated. Sarah Rundell reports.
After a decade of explosive growth, expansion opportunities are rare in developed telecoms markets where most deals constitute refinancing and acquisition finance. In contrast, in developing markets, particularly Africa where networks are still being built out, new deals are being signed.
In Asia, one market is just starting to open up for the first time. Myanmar, one of the world’s last untapped mobile phone markets, is currently tendering for licences. “Myanmar is starting from a low base; there is minimal infrastructure,” says Matthew Cox a partner in law firm Dentons’ banking and finance department in Singapore. “Expect lots of interest from European and Asian telcos and also a degree of innovative financing because the legal system is undeveloped – service providers and manufacturers have all to play for.”
In developed markets the satellite sector is buoying trade flows, increasingly meeting demand for ever greater bandwidth and internet connectivity. Here, deals are being driven by established players launching new satellites or replacing existing installations and new players entering the market. Deals are supported by export credit agencies, often co-operating to finance the bigger projects, and public markets, as traditional bank markets still lag.
But it is India, where renewable energy is being used to power telecoms infrastructure, that is spearheading one of the most exciting trends in telecoms financing. In rural areas, poor power supply is the biggest obstacle to telecoms take-up, yet these are key future growth markets in the country and in other developing regions. According to research from management consultancy group Tata Strategic, 60% of the power required for telecom towers in India is met by diesel generators which consume more than 2 billion litres of diesel per year. Now Bharti Infratel, one of India’s largest tower infrastructure companies with over 33,000 of India’s estimated 400,000 towers, is leading an initiative to use renewable energy to power its tower infrastructure in off-grid areas in Uttar Pradesh. It is working with New Delhi-based OMC Power, one of the most established Renewable Energy Service Companies (Rescos) carrying out these renewable refits.
Although the market is still small, the potential is huge. The International Finance Corporation (IFC) and GSMA, the organisation representing mobile operators, estimate there are about 640,000 off-grid mobile-network sites in developing countries powered by diesel generators. Around 120,000 of these could adopt more environmentally-friendly green-power solutions and technologies such as solar, wind, fuel cell, and deep-cycle batteries that would help reduce their environmental impact and running costs. Research by consultancy Navigant estimates that off-grid mobile telecoms base station revenues will reach US$10bn by 2020.
But solar adaption incurs high capital costs and access to capital and trade finance is difficult. In the initial wave of refits, most have been financed on the capital expenditures (capex) model whereby the telecoms operator invests in the renewable refit and benefits itself from the diesel saving.
More recently, Indian operators have grown loath to finance the conversion to green power themselves. Now renewable refits are more commonly financed by the vendors of the service, the Rescos like OMC Power, in an operational expenditure (opex) model. Here the operator makes no investment but partners with a Resco which purchases and installs the renewable power supply and then sells the power back to the telecoms operator. The power is usually sold back on a per-kw base where the operator pays for what they use in a conventional power purchase model. In another model, the vendor can charge a fixed monthly fee for its power. But because few Rescos have a proven track record or a strong balance sheet, India’s telecoms operators remain wary of partnering with them. They say they want government subsidies or third party investment to shoulder the cost. “It costs about US$100,000 to convert a site from diesel to green energy in India,” says David Droz at New York-based renewable energy specialists Urban Green Energy. “Tower owners are keen because renewable energy is cheaper than diesel, but the capital expenses are very high. How to finance the conversion of sites is now the big question.”
OMC Power’s co-founder and CEO Anil Raj says his company was able to raise finance from its group of private investors and banks because it reassured by offering projects that would scale up over time, and long-term 10-year loans. “Investors in these projects want to see real payback before the agreement runs out and they want a model that has opportunity to grow.”
He believes that new sources of finance from ECAs in countries producing the solar technology, particularly the US and China, will soon enter the market guaranteeing, and even lending, to projects. “ECA guarantees could become part of the finance; we will need to look at the cost of this against the cost in the local market.”
So far, few projects exist outside India but it is a sector African bankers have begun to look at, particularly in markets outside South Africa where the power shortage is even more acute than in India. “Mobile operators have begun running tests on using renewables although we haven’t actually seen this in large scale deployment across operators,” explains Iain Macaulay, lead principal for telecoms at Nedbank Capital, who believes it will be up to three years before this type of financing appears in Africa, and will only come once regulatory pressure steps up a gear. “As a lender we could either support the equipment supplier, in the financing, or the operator, providing a tranche of the loan,” he says. “We’d want to take the cashflow at a senior point in the waterfall, at the point where the operational cost savings would materialise.” He reiterates that banks would only want to lend to large groups of towers, rather than individual refits.
Africa’s telecoms market is one of the few left in the world with room to grow. With mobile penetration at around 46%, it is well below other developing markets like India, where penetration is 71%. A recent flurry of deals in Nigeria have been characterised by local banks’ appetite to lend. Etisalat Nigeria has just closed a US$1.2bn loan to finance network upgrades and expansion backed by 13 Nigerian lenders, and MTN Nigeria secured a US$3bn loan from 17 local banks and seven foreign lenders in April.
In another trend, African operators are seeking to cut costs to fund new technology by sharing infrastructure. South African operators have already begun to share their tower infrastructure in response to increased competition and the need to invest in new technology. Tower sale and lease back structures, like American Towers’ US$430mn purchase of South African group Cell C’s tower infrastructure will increasingly crop up in other markets as Africa’s pan-regional operators seek to cut costs.
Bharti Airtel could be about to offload its 18,000-odd mobile towers in Africa to its India tower subsidiary Bharti Infratel. “It’s not clear yet what strategy these operators will follow, whether they will own the infrastructure or enter into a pool with others on a country or regional basis. However there is no doubt they want the operational cost saving,” says Nedbank’s Macaulay. Without operators beginning to share towers the number of telecom towers will have to double from 75,000 to 150,000 and that’s just for 2G traffic, according to research by Helios Towers Africa, an African tower company.
New players enter orbit
In developed markets, volumes have been dominated by refinancing and acquisition finance in recent years. But a steady flow of satellite financings continues to boost trade flows. Here strong export credit support is led by US Exim and France’s Coface, involved in recent satellite and launch services financings for operators including NewSat, AsiaSat, MEASAT, Asia Broadcast Satellite and Eutelsat. US Exim’s satellite financing is now its fastest-growing portfolio and includes direct loans to satellite operators – unlike Coface which tends to only provide bank guarantees to commercial banks. In the fiscal year 2013 to date, US Exim has authorised US$89mn in support of US satellites and related services, financing approximately 60% of US commercial satellite sales in the last three years.
Other ECAs are also stepping up their presence in the market. The Export-Import Bank of China supports its domestic satellite industries, most recently via SupremeSAT of Sri Lanka’s acquisition of SupremeSAT-2. Other active ECAs include the Export Development Canada, increasingly active since domestic group MDA bought US Space Systems Loral. Even Russia is stepping up with its Export Insurance Agency of Russia, backed by Russian development bank Vnesheconombank to support its satellite manufacturing and launch services industries.
In one trend, ECAs are working together to finance the biggest projects. “It’s not unusual to see the big ECAs involved in the same transaction,” says Maury Mechanick, a counsel at White and Case in New York. “For example, Coface will provide the finance for the launch services and US Exim for the actual satellite, in essence co-financing a project. It’s not only about competition now.” It’s a trend he believes will become more prevalent with growth in demand for so-called super satellites.
These can deliver broadband speeds comparable to cable speeds and benefit by not having fixed access points, so are able to be repositioned and adapt as demand grows unlike fibre. Hughes Network Systems and competitor satellite broadband company ViaSat have both pushed ahead with giant satellites with ViaSat recently announcing plans to work with Boeing to develop and build a ViaSat2. “As satellites become on a bigger scale they become more expensive; the total package can cost US$0.5bn or more. As the costs rise, so to do the risks.”
Another development in the satellite sector has been the rise of structured financings in the form of strategic alliances and joint ventures, explains Peter Nesgos, a partner in the New York office of Milbank, Tweed, Hadley & McCloy.
“We are hearing a lot about hosted payloads, whereby governments or commercial companies are benefiting from satellite capacity without having to procure their own satellite systems,” he explains. “I expect we will see more of these kinds of strategic alliances in the near term, facilitating development and financing of new satellite projects and ventures.” Hosted payloads offer piggyback rides or hitchhiking opportunities on commercial spacecraft already scheduled for launch. It’s a way for government agencies, or other entities, to send sensors and other equipment into space on a timely and cost-effective basis. “The provider of a hosted payload gets the capacity it needs without incurring the cost of procuring its own satellite and launch services, while the host can secure the financing it needs based on the credit of the payload provider, and having the benefit of a significant portion of capacity pre-sold,” says Nesgos. Recent examples include the Intelsat IS-22 satellite hosting a UHF payload for the AAustralian Defence Force and Iridium hosting an air navigation payload for newly-established Aireon, its joint venture with NAV Canada.
Satellite companies that compete in the same markets are also increasingly collaborating for mutual advantage.
This could include two satellite companies having similar needs and different contributions, such as the recent pairing of MEASAT of Malaysia with Azercosmos of Azerbaijan. Alternatively, it could be two satellite companies seeing the advantage of joining forces in procuring satellites and launch services to compete against global competitors. Asia Broadcast Satellite and Satmex of Mexico recently combined to purchase four new-technology, all-electric satellites from Boeing, launched in pairs on SpaceX Falcon launchers. “Whether this trend is a product of financial necessity or creative efficiency, or both, innovation in satellite project structuring is likely to grow,”