As the telecoms market reaches saturation point, financiers are beginning to turn to nascent industries such as satellite technology. Eleanor Wragg reports.
The last decade has been arguably the most exciting in the telecommunications industry’s history, and has certainly been an era of phenomenal growth. At the dawn of the new millennium, less than one-fifth of the world’s population had access to a telephone, while today, according to data from the International Telecommunication Union (ITU), almost 90% have mobile phone subscriptions, leaving little room for further growth.
The global telecoms market is set to grow at just 4% in 2012, down from 7% in 2011, according to Pyramid Research. In developed markets, operators have started to reduce costs by, for example, sharing infrastructure with others, such as O2 and Vodafone in the UK, who are set to pool their mobile phone masts and antennas by 2015. Others are choosing to buy out competitors.
“In continental Europe, TMT [technology, media and telecommunications] financing is now mostly driven by acquisition events,” says Benoit Tanguy, co-head of TMT finance for Société Générale, adding that bankers were recently working on the first steps of the sale of the Belgium telecoms firm Base from its parent company KPN in the Netherlands. However, as GTR goes to press, this sale process has been cancelled with KPN citing difficult financial market conditions. Bankers have now turned their attention to KPN’s sale of its German mobile telecommunications operator E-Plus Towers and the sale of MultiMedia Polksa, a Polish cable operator.
As the global telecoms market slows, interest in new technologies such as satellites is beginning to grow. Though there also remain telecoms financing opportunities in the developing world.
In the emerging markets, the telecoms sector is growing at 8% a year, according to research firm Delta Partners, and nowhere is this growth more evident than in Africa, where many countries are receiving billions of dollars in funding in order to upgrade GSM networks, install 3G and roll out fibre-optic cables.
One example is Mauritian telecoms company Econet Wireless Global, which secured a US$362mn financing for purchases of equipment from Ericsson in Sweden and ZTE in China to expand its network in Burundi and Zimbabwe in early July.
The deal is composed of a US$130mn syndicated facility arranged by Afreximbank, to be used in both subsidiaries, and a US$232mn public-private tranche reserved for the company’s Zimbabwe business.
Afreximbank provided US$63mn for the first syndicated loan, with the remainder extended by European development finance institutions (DEG, FMO and Proparco, who contributed US$20mn each), and Zimbabwean banks Commercial Bank of Zimbabwe (US$5mn) and TN (US$2mn).
Peter Kasanda, legal director at law firm Clyde & Co, based in Dar es Salaaam, which advised the company, says the deal was particularly interesting due to it being a regional play from a home-grown company.
“It got its own financing and eventually did this one big deal, and that shows maturity of the market,” he adds. However, he says that the involvement of development finance institutions in the deal was essential to filling the funding gap.
“You don’t find this in European deals – that’s just commercial banks or sometimes it’s funded off a company’s balance sheet,” he notes.
The telecoms market in Africa has lagged behind other parts of the world, and is far from maturity. Kasanda adds that the big drivers for telecoms in the region are underwater fibre-optic cables off the coast, and satellites: “There are countries that have four to five times more satellites just on their own than what Africa has as a whole continent, so there’s a lot more scope for further satellite projects,” Kasanda says.
And satellites are rapidly being seen as the next big thing by operators and financiers alike. Insight Research estimates that by 2013 global telecommunications spending will exceed US$3tn, despite market saturation in developed countries, as service providers are forced to deliver more bandwidth and win new subscribers.
The International Data Corporation (IDC) forecasts that end-user demand for worldwide wireline and mobile broadband traffic will increase from 9,665 petabytes a month in 2010 to 116,539 petabytes a month in 2015.
“At the moment there is a need for telecom operators to meet increasing traffic demand on both the mobile and on the fixed side,” says Tanguy at Société Générale.
Satellites are set to meet this demand. While satellites are more successful in emerging markets due to lower penetration of competing systems, such as fibre-optic cables, they are also useful in developed countries, as they can extend terrestrial infrastructure, immediately serving large audiences at very low marginal cost.
“For the emerging markets, we are seeing more export finance transactions for the development of mobile operations or satellites being launched to cover specific regions,” says Tanguy.
Sociéte Générale is already relatively experienced in providing satellite financing, having worked on the launch of global mobile satellite communications firm Iridium’s next-generation satellite constellation, Iridium Next. The fleet, which will be launched from the first quarter of 2015, will replace the satellites first launched in the late 1990s, which are coming to the end of their operational lives.
A US$1.8bn credit facility was secured for this launch in late 2010 and involved 95% cover from the French export credit agency (ECA) Coface.
The financing was syndicated through nine banks led by Deutsche Bank, Banco Santander, Société Générale, Natixis and Mediobanca International, and includes BNP Paribas, Crédit Industriel et Commercial, Intesa Sanpaolo and UniCredit Bank Austria.
Although interest in satellites is growing, it is not always easy to finance them. Given the development time for a satellite and its relatively long asset life, it is very difficult to predict with great certainty the future market. This market risk is the fundamental and difficult challenge within the satellite industry.
“While there is a range of risks within the industry, my perception is that private capital has increasingly characterised the entire sector as high risk,” explains John Schuster, vice-president of structured finance at US Exim. “However, there are many well-established service providers with excellent balance sheets, there are many growing companies that have had access to strong equity capital and there are a number of players that are not high risk.”
Faruq Muhammad, regional head of structured export finance in the Middle East and Africa for Standard Chartered adds: “With standard telecoms you can have a better ability to understand what the market looks like, there’s adequate research out there.
“With satellites it’s slightly trickier because the market risk is very high; whoever is going to buy bandwidth from the satellite doesn’t want to commit to it until the satellite is already up there, whereas bankers would want a certain level of commitment to be there before the satellite goes up.”
Given the nervousness of the commercial banking market, ECAs are playing a central role in satellite financing deals. From 2008 to 2009, export credit financings in the sector jumped tenfold, from US$300mn to US$3bn. For 2010 to date, commitments total more than US$2bn.
Approximately one-third of all satellite-related finance deals signed in the past three years have involved ECAs. Between France’s Coface, US Exim and the Chinese government, ECAs have been extremely active in securing domestic and international satellite and launch industries.
“The lack of financing is largely responsible for our emergence within this sector, precisely because long-term and even medium-term capital for satellite transactions looks as if it will continue to be very scarce,” comments Schuster.
“Even established satellite operators are looking at ECAs because the lack of other financing sources has been so significant.”
In Africa, ECAs are important for the satellite market because of the cover against risk that they provide. “Having ECAs involved is crucial in this market, not just from a liquidity point of view, but also from the point of view of being in quite volatile political waters in these countries,“ says Kasanda.
The continued lack of private financing appetite means that there is a risk that the smaller, regional operators will ultimately be pushed out.
“In the satellite space, there is a bigger challenge with the mid-tier and regional names which are looking at bank financing. Unlike the big players like IntelSat and EutelSat that can raise financing on their balance sheet, the regional players would prefer to use project finance structures. While ECAs continue to play a strong role in providing financing support to these projects, project finance structures may results in fewer banks out there to take that risk,” explains Standard Chartered’s Muhammad.
Despite the risks and difficulties in obtaining financing, the overall sentiment is that the mobile satellite sector is doing well.
“The telecom industry is a very resilient sector and it’s one of the safe havens where debt investors believe that they can invest and get a return on their money,” says Tanguy. As an illustration, Société Générale was a bookrunner for the full €1.4bn refinancing of Spanish telecoms firm ONO in May. The six-year credit agreement refinances ONO’s existing bank debt one year ahead of its original maturity.
“I think it’s evident that even though debt investors were really concerned about the Spanish economy’s future, a strong telecom operator such as ONO can still go to the market and raise a significant amount of money,” Tanguy adds.
“We are seeing a lot of market growth,” explains US Exim’s Schuster. “Thus far the growth of satellite service demand, especially in developing country markets, has been strong. It does look as if the overall growth for broadband and telecoms service is part of the world economy that is growing.”