Telecoms financing is gradually maturing across Africa, with world-beating growth, reports Kevin Godier. As well as a frenzy of mobile telephony deals, cable projects are gaining momentum too.
More than 130mn Africans have been brought far closer together by the mobile revolution, which has overridden old and unreliable fixed line networks and made the continent the world’s fastest growing cellular market.
In Uganda, there are now five cellular operators after the recent licence award to Abu Dhabi-based Warid Telecom, while South Africa already has a telecoms system ranked close to European standards.
In terms of financing benchmarks, Nigeria concluded one of Sub-Saharan Africa’s largest ever debt facilities in late 2007, a ground-breaking five-year, US$2bn syndicated loan for telecoms provider MTN Nigeria, where bank appetite raised the facility from an original US$1.2bn target.
The evidence of telecommunications progress across the continent is nonetheless counter-balanced by numerous signs that much remains to be done, bringing further opportunities for financiers.
Even in Lagos, at the heart of Nigeria’s commercial markets, “people carry two cells”, says Charles Carlson, global head, structured export finance at Standard Chartered Bank. “There is no universal signal in all parts of the city, and the coverage can disappear,” notes Carlson, whose bank was a joint lead arranger for a US$3.8bn debt financing used by MTN for acquiring all of Investcom’s mobile networks, and which was mandated recently to structure financing for Ericsson equipment for a Ugandan licensee.
People pushing growth
Taken overall, Sub-Saharan Africa remains a frontier telecoms market. The populations in the biggest countries are underpinning strong, fast growth in an industry where many countries will have at least two or three licences, and some even more.
“There is lots of activity, in all regions, with most of the financing going to the obvious countries – such as Nigeria, Tanzania, Kenya, Ghana – where there is more financing capacity,” underlines Nina Triantis, global head of telecoms and media at Standard Bank, which arranged the MTN deal, and has worked closely with MTN and Celtel throughout the continent.
She adds: “A lot of the activity is driven by existing operators which are still building networks, and need more capital expenditure funding. The market is also being driven by new licence auctions and awards, but there will come a point when there is no more room for new operators. Merger and acquisition [M&A] activity is also a big driver, and further consolidation is expected on the continent.”
The region’s more negative differentiators from other large regional markets globally include structural subordination issues, local ownership regulations and political instability, according to Anthony Wilter, head of telecommunications, media and technology at Absa Bank, which has been involved in telecoms financings in Botswana, Zambia, Kenya, Uganda, Tanzania and South Africa amounting to over US$1bn.
Wilter also cites a widespread “lack of foreign exchange in country, which can make the servicing of dollar-denominated debt difficult”.
For local currency transactions, “MTN Nigeria was the best indicator yet of what can be done,” says Paul Eardley-Taylor, senior vice-president, debt and infrastructure, in HSBC’s Johannesburg-based investment banking team, which advised a local shareholder on divesting an MTN Nigeria stake, among a series of other telecoms advisory mandates.
“The local banks can lend so much, which resulted in an oversubscription to a US$1.6bn naira tranche by local banks. For the dollar tranche, appetite was much less, even at 200 basis points,” Eardley-Taylor stresses.
The MTN Nigeria transaction illustrated a paradigm flagged up by Wilter, whereby mobile operations that have relatively strong financial positions are able to raise finance on their own balance sheets, in local currency, without recourse to their parent company.
“The main downside of in-country funding is that the cost of funding will be significantly higher than funding with a parent guarantee. On the upside, the funding is in local currency so cashflows are matched to the liability from a currency perspective. This non-recourse funding also frees up the balance sheet of the parent company, and is particularly useful where there are minority shareholders who cannot guarantee debt due to weak financial positions,” Wilter explains.
With a subscriber base that is expected to exceed 50mn by 2011, Nigeria has proved to be Africa’s biggest telecoms cash-cow, and one where the high margins available to sponsors helped Celtel obtain a US$1bn-plus syndicated loan at the beginning of 2007.
“If the cashflow is there, you can raise a medium-term financing with commercial banks,” stresses Sainesh Vallabh, an associate in HSBC’s Johannesburg team.
Telecoms sponsors in Tanzania and Kenya have also raised significant local currency financing. In Tanzania – where Abu Dhabi-based Etisilat recently raised its stake in Zantel to 51% – “just short of US$300mn is the top number that sponsors can raise,” comments Eardley-Taylor.
As GTR went to press, Celtel Tanzania was due to raise a US$270mn facility in local currency, after commercial bank oversubscription for an initial US$210mn facility.
“Ghana should also come to market over the next 12 months. MTN has indicated it is looking to refinance its local operation,” says Vallabh.
Although still a relative unknown for syndicated loans, Millicom has tapped a “pure dollar” US$140mn deal for its Ghanaian operation, Triantis emphasises.
Its Tanzanian operation also raised a US$22.45mn loan in March 2007 through sole arranger Citi. The transaction is the first financing in Tanzania under Opic’s Africa-Middle East Risk Sharing Framework and the first local currency guarantee provided by Citi under the framework.
The deal is one of only 40 honoured with a GTR Best Deal of 2007 award in this issue.
Elsewhere, “a couple of deals are being looked at by us in Democratic Republic of Congo [DRC] and Uganda,” says Marcel Ivison, Standard Chartered Asia’s head of structured export finance, based in Singapore.
One pattern observed by Jonathan Berman, principal at financial advisor Fieldstone Capital, is the evolution of consolidation within the sector.
“The spate of successful project financings that characterised most early mobile deals has slowed down as there has been a concentration of ownership over the past two years. MTN has acquired a number of companies, alongside some smaller-sized consolidations,” he notes.
“The consolidation trend has seen opportunities become available with groups like Millicom and Orascom, and has brought Middle Eastern players like MTC (the Kuwait-based Mobile Telecommunications Company) and other global players into Africa,” adds Sainesh.
MTC acquired Celtel in 2005, and has subsequently invested US$10bn in African mobile telecom services that are wrapped under the Zain brand name.
This ‘second wave’s of activity has also brought sponsors up against more political and country risk difficulties, creating an innovative financing model which saw the International Finance Corporation (IFC) put together its largest ever Sub-Saharan financing in mid 2007.
The seven-year, US$320mn package – including a US$160mn commercial banking B-loan – was accompanied by parallel lending from development finance institutions (DFIs) and extended to Celtel to help expand and upgrade its growing mobile networks in the DRC, Madagascar, Malawi, Sierra Leone and Uganda.
“DFI money is also very important in markets where credit is difficult from a commercial point of view – DFIs are involved in the Celtel Tanzania deal, and took a role in Millicom’s deal in Ghana,” she adds.
Export credit agencies (ECAs) may also have a greater role as liquidity comes under pressure globally. “With a network rollout, ECA-sourced money is still attractive, especially if a European supplier such as Nokia or Siemens is involved,” says Triantis, while Carlson underlines that Belgium’s ONDD supported local currency lending in Kenya several years ago, “bringing in institutional money from the Kenyan market”.
Inevitably, Chinese financing and insurance is a growing factor in Africa’s telecoms market, especially in smaller or higher-risk markets. “Sinosure and China Exim have quite clearly shown appetite for vendor finance involving suppliers to Africa such as ZTE and Huawei,” notes Carlson, adding that Standard Chartered has arranged Sinosure-backed telecoms transactions for Zambia and Ghana.
“Sponsors can get cheap financing from China Development Bank,” says Triantis. “Millicom raised its financing over seven years that way for its DRC project, in which Huawei was the vendor. Vendor finance provides an alternative to commercial bank finance, which would not be extended beyond one year for the DRC, and would need PRI,” she comments.
Standard Chartered, for its part, has negotiated a memorandum of understanding with China Eximbank. “On a case-by-case basis we can introduce international projects to them in Africa and elsewhere if there is Chinese sponsorship or other interest,” says Ivison.
In tandem with the surge in Middle Eastern telecoms sponsorship, other financing techniques for sponsors have grown to include Islamic money. In Sudan, for example, Zain has raised just below US$250mn for its network via an Islamic structure, bankers note.
Inevitably the political risk in some countries is too high to structure telecoms finance.
“Zimbabwe is a ‘no go’s for any bank, and even an ECA could not see itself getting the money back there,” comments Eardley-Taylor. “There are also sustainability-type pressures on banks, ECAs and investors that may hold people back in difficult markets.”
Of course Kenya – where further financings are in the pipeline – will also be a future test, say bankers. “The country is not a credit risk as such, but the recent turmoil didn’t help financing prospects,” one financier contends. “On the other hand, Zain has selected Nairobi as its African headquarters, despite the ongoing crisis in the area.”
Despite the fallout from the US sub-prime crisis, which has placed a premium on international bank capital, telecoms sector liquidity globally has really suffered only in Russia and the CIS, according to Triantis. “Elsewhere, appetite remains quite buoyant,” she argues, adding that margins are so low “that banks hardly get compensated for country risk, especially if lending offshore.”
In Africa, the appetite is underpinned by “some pretty strong banks in South Africa and Nigeria, which have supported the multiple licences obtained by Vodafone and MTN with good relationship banking,” says HSBC’s Vallabh.
A significant feature of the MTN syndication, observes Triantis, was the presence of Commerzbank and China Construction Bank, adding that Celtel’s Nigerian deal pulled in JPMorgan and a Gulf-based bank.
“Those show that a few international commercial banks out there will take the risk, although obviously Africa is not a market comparable to Asia, Latin America or the CIS.”
According to Carlson, participant banks’s risk appetites are considerably enhanced if there is recourse to sponsor parent groups in South Africa, Saudi Arabia or elsewhere.
“Lots of projects are being developed by fairly large groups, all of which have significant backing and are borrowing from the centre, which is often lower cost than project finance,” he comments.
As financing needs increase beyond the syndications market, money from funds can provide additional equity and lending, says Eardley-Taylor. “There are quite a few funds dedicated to Africa, which offer capacity well north of US$1bn, and it is only a matter of time before investors opt for telecoms, given the sectoral successes. We expect to see several fund-driven deals later this year.”
“The general trend is that telecoms businesses perform so well, that even in countries with political strife, they are able to provide a service and return for shareholders,” says Tarun Brahma, senior investment adviser at Frontier Markets Fund Managers (FMFM), which advises the Emerging Africa Infrastructure Fund (EAIF) and GuarantCo, a financier of six previous Celtel deals. He adds that the EAIF and GuarantCo are looking at opportunities in Ghana, Niger and East Africa.
Although the sub-prime developments have hit the bond markets hard, local currency bonds offer a further future option. “It has not been seen yet, but represents a potentially new investor base,” says Triantis.
GuarantCo, which guaranteed a local currency loan to Celtel in Chad in 2007, “can also guarantee bond issues – it is unique amongst the DFIs as its sole purpose is to provide local currency guarantees,” points out Brahma.
Further financing packages will be required for an associated technology trend, involving various cable projects around Africa’s east and west coasts. “Some seven cable projects are lining up, some competing, and some complementary, most with a South Africa angle,” says Carlson, adding that Standard Chartered is advising on a Kenya-centred cable project.
A financing model was laid down in late 2007, when IFC, the African Development Bank, European Investment Bank, and French and German developments banks, KfW and AFD, signed up to provide US$70.7mn in long-term loan financing for the US$235mn, 10,000km East African Submarine Cable System, a landmark fibre-optic cable project now underway that will connect 21 African countries to each other and the rest of the world with high-quality internet and international communications services.
The remaining financing will be provided by 25 private telecommunications operators who will run the cable as a consortium. Another cable project, the Seacom undersea fibre optic cable system, connecting South Africa, Madagascar, Mozambique, Tanzania, Kenya, India and Europe, has also reached financial close.
“We are working towards disbursement,” says Brahma, noting that EAIF is one of Seacom’s financiers, having back-leveraged IPS Kenya for its participation in the project.