At the height of the Gaza conflict in January, Standard Bank joined forces with other international and Palestinian local banks to help close a US$85mn syndicated structured project financing facility to enable the build-out of a new mobile phone network in Palestine. The deal is one of the largest foreign direct investments made in the region, and the first cross-border agreement for the local Palestinian banking sector. Rebecca Spong speaks to the deal team to find out how they managed it.
Closing a large, long-term project financing in Palestine was never going to be an easy job. For many, the risks of supporting a seven-year non/limited-recourse US$85mn transaction to finance the roll-out of a new mobile telecom provider in Palestine may well seem insurmountable.
Yet, just as the political tensions in region spilled over into actual conflict at the end of 2008, with Israel launching a series of missile attacks across the Gaza strip, Standard Bank managed to close its structured syndicated facility financing for the new mobile operator, Wataniya Palestine Telecom (WPT).
The required telecoms equipment is being imported from Swedish firm Ericsson, and the deal has the backing of the Swedish Export Credits Guarantee Board, Exportkreditnämden. The World Bank’s International Finance Corporation (IFC) is also providing funds.
Commercial roll-out of the new network in the West Bank is expected to be completed in the first half of this year.
“When you go into this world to start with, when you make that first step and carry out a normal piece of country risk analysis, you will of course ask what is the worst that can happen?” explains John O’Mulloy, managing director at Standard Bank.
“Although we had prepared ourselves for such an eventuality, the timing of military attacks was unexpected. You really wish that when you come to actually drawing the facility down – you don’t find yourself in the actual week of the most violent scenario you could possibly imagine.”
With the increasingly controversial conflict engulfing the region and whipping up angry protests across the globe, those working on the deal had to think long and hard about whether they were really ready to take on the risks. Clearly the risks they were facing were physically falling from the sky, rather than neatly wrapped up in a financial risk model.
O’Mulloy explains that despite such extreme obstacles, the team felt there were still strong grounds to continue with the project. “We gathered round, and met with everyone in that situation and agreed to go forward. Everyone had already done the work and there was a huge sense of moral commitment and belief from the lenders in the project. Everyone would have been very distressed if we had to change our position due to a political event in Gaza.”
There was a real feeling among the international and local Palestinian lenders that through financially supporting the new mobile network build-out, they could help to liberalise the telecom market and bring much-needed prosperity to the West Bank. Additionally, despite the deteriorating political situation in Gaza, the environment in the West Bank where the project is based, has remained calm over the past 12 months, allowing for significant progress to be made in building the local economy.
O’Mulloy remarks: “We are great believers that mobile development in the highest risk and most difficult markets can make a huge difference to the population and to economic development.”
“Think about the impact on Palestinian banks, job creation, and improvements in mobile services. The spread out of economic benefits we have just seen time and time again.”
“In a country so politically fractured, where movement of citizens can be so difficult, mobiles can facilitate economic growth and reduce barriers to communications. We’ve seen it in the Congo, we’ve seen it in Afghanistan. If there is a threat of political violence, people will of course want to stay in touch to ensure their families, friends and loved ones are safe. They might, for instance, seek to find out which checkpoint is open,” he observes.
More positive times
The initial stages of the deal took place in early 2008, almost a year before its successful signing and long before the regional tensions flared up into war.
When Wataniya Palestine Telecom (WPT), which is incorporated under the laws of the Palestinian Territories, began approaching banks for funding, it generally faced a flat refusal, or terms and conditions that they felt were too restrictive.
Standard Bank’s decision to take on the deal was driven by the confidence in the professionalism, experience and track record of the WPT management team, as well as the quality of the sponsors.
“Any project can go wrong commercially – it is a fact of life when doing business. But there was a lot of comfort derived from the sponsors and their commitment to making the project work. At the end of the day it is the level of commitment from the sponsors that can make or break a project,” explains Jiří Chotěborský, director, telecoms and media, Standard Bank.
In particular, one of the team at WPT had experience of similar telecoms roll-out projects in high risk regions, having worked on a previous Standard Bank transaction in Afghanistan, signed in 2006. In this deal, Standard Bank backed a US$10mn commercial tranche of financing for the Afghan telecoms company Roshan.
WPT also has the strong backing of high-profile telecom companies. It is 57% owned by mobile operator Wataniya International, which is in turn a 100% owned subsidiary of Kuwait-based NMTC (Wataniya Telecom), which is itself 51% owned by Qatar’s Qtel. The Palestine Investment Fund (PIF), a major investor in the Palestinian economy, also holds a 43% stake in WPT.
In addition to its Wataniya Telecom portfolio, Qtel operates GSM operations in Oman, Iraq and three Asian countries (Singapore, Cambodia and Laos) via a 25% stake in Asia Mobile Holdings majority controlled by Singapore Technologies Telemedia.
Qtel also holds a 41% stake in Indosat in Indonesia and is making a tender offer to increase its share in Indosat to approximately 65%. The company also operates wireless broadband/Wimax networks in Jordan and Pakistan.
Wataniya Telecom has GSM operations in Kuwait, Algeria, the Maldives, Palestine and Tunisia and therefore has a strong track record of working in emerging markets. Without having such well-regarded telecoms sponsors on board, the proposed US$85mn financing would not have had the same appeal.
The PIF has as its primary objective the building of an independent, viable and sustainable Palestinian economy. The fund focuses on developing and investing in strategic projects in key sectors of the economy.
‘The ‘marriage’ of Wataniya/Qtel and the PIF gave us great confidence in them as individuals and in their ability to dovetail extensive foreign expertise with detailed knowledge of the workings of the local market” remarks O’Mulloy.
When negotiating with Standard, Wataniya Palestine Telecom (WPT) gave the bank a list of requirements, which included:
- Long-term funding
- A sufficient grace period
- No or very limited recourse to sponsors
- Attractive pricing
- Mobilisation of domestic funding
- Mobilisation of export credit agency (ECA) funding and development funding
Standard Bank managed to meet these requirements, providing financing for up to seven years by bringing in Sweden’s Exportkreditnämden to provide political and commercial risk coverage. With the help of GuarantCo – a specialised infrastructure guarantee fund – which provided commercial guarantees, Standard Bank succeeded in attracting significant local financing with a long tenor. The World Bank’s International Finance Corporation (IFC) also played a key role in providing comfort in terms of political risk coverage.
Standard Bank divided the US$85mn facility into two tranches, a 3.5-year tranche which Standard Bank fully funded, and a larger seven-year tranche, featuring commitments from IFC, Ericsson Credit (guaranteed by the Swedish Export Credits Guarantee Board) and three Palestinian banks: Bank of Palestine, Al-Quds Bank and Commercial Bank of Palestine, (guaranteed by GuarantCo).
The 3.5-year tranche has a two-year grace period, four equal semi-annual repayments, while the seven-year tranche has a two-year grace period and 11 equal semi-annual installments.
The greenfield nature of the project, necessitated that the repayment schedule be tailored to its cash-flow and therefore it was essential for the client to secure longer term financing.
Getting the Palestinian banks on board was another significant and vital aspect in ensuring the deal was a success, and for those involved, it was one of the more rewarding tasks.
Traditionally, the Palestinian banks are relatively small, and have not seen this scale of international financing. Nevertheless, Bank of Palestine, Al-Quds Bank and Commercial Bank of Palestine showed enormous interest in and support for the project. Bank of Palestine was one of the early active participants in the facility and Al-Quds Bank and Commercial Bank of Palestine spared no effort in getting up-to speed once they had made a decision on their involvement. In order to assist the local banks in getting comfortable with the transaction and to allow them to maximise the size of their participation which would otherwise have been limited by single obligor limits, Standard Bank brought in GuarantCo, which was able to provide commercial risk cover for the local banks.
“The local banks are a sizeable part of the deal – and it is the most long-term structured deal they have witnessed in the Palestinian market. It was important to get GuarantCo’s commercial risk mitigation to get them on board,” remarks Chotěborský.
He goes on to argue that this deal provides significant benefits for the Palestinian banking sector. The Palestinian banks gained exposure to international best practices as well as the opportunity to develop a partnership with Wataniya Palestine Telecom, which could lead to the joint development of new services such as mobile banking.
It also gave the Palestinian banks the chance to establish contact with an export credit agency, GuarantCo and the IFC, all of which could be potential partners in future projects.
From a legal perspective, the deal also posed a number of unique obstacles. On the Palestinian side, the local legal counsel was Husseini & Husseini, while international law firm Norton Rose advised the lenders.
A spokesperson from Norton Rose comments: “The challenges of dealing with the Palestinian legal environment and practice in the Wataniya Palestine Telecom transaction relate to the fact that the transaction was, to our understanding, the first of its kind in Palestine and accordingly practitioners in Palestine had less familiarity with the requirements of a financing transaction or project of this nature and of dealing with the requirements of international lenders and multilateral agencies.
“Additionally, Palestinian law is evolving with regard to the taking and enforcement of security and consequently, agreeing a security structure that met the requirements of the finance parties and then documenting this within the confines of Palestinian law and practice was in itself a challenge,” he adds.
Looking at the wider local legal system, the Palestinian judicial system differs from other systems around the world. As a result of a complex history of occupations by British, Ottoman, Jordanian and Egyptian forces, there still exists a patchwork of laws that originate from these different judicial systems. Over the past 14 years, the Palestinian authority has made strenuous efforts to unify the system, particularly with laws relating to the economy and the judicial system.
Establishing business links
Standard’s efforts to tap into the local banking sector and find local expertise was aided greatly by the more conducive business environment found in Palestine eight months before the recent conflict.
In mid-May 2008, the Palestine Investment Conference was held in Bethlehem on the West Bank, and the event proved to be an ideal time for Standard Bank to meet the necessary banks and corporates. Given the political significance of the conference for the future of the West Bank, foreign visitors were able to move around with far greater ease than normally anticipated in the region.
The conference was supported by the Office of the Quartet for the Middle East, with former UK prime minister, now quartet representative, Tony Blair, playing a key role in encouraging private sector investors to attend the conference. Blair was also instrumental in negotiating with Israeli and Palestinian authorities to reach various agreements that would allow for increased foreign investment in Palestine.
The development of Wataniya’s (WPT) telephony license was one of Blair’s key policies in a framework plan he set out in May 2008, aimed at supporting economic and social development in the West Bank.
With the Quartet helping to create a more business-friendly environment on the political front, Standard Bank and the other lenders did not play a direct role in the negotiations surrounding the network license and network development.
In terms of minimising potential problems that could affect the financing package, the burden was placed on the client to demonstrate to the banks that there was sufficient political support for the launch of a new mobile operator.
Of course, given the high risk nature of this deal, it was impossible to eliminate political risks, and this is where the ECAs and multilaterals step in to provide vital cover.
Having a sponsor with strong local knowledge also helps mitigate the impact of possible political problems. For instance, there is always the risk that an embargo on equipment imports to the West Bank could delay the establishment of the new telephony network. Timing of equipment deliveries and good logistical support are crucial in minimising this risk.
The success of the Palestine Investment Conference highlights, among other things, the enthusiasm for a new Palestinian mobile operator among government officials, large corporations and consumers, as well as banks and international bodies. However, this level of excitement can just as easily be gauged on the streets of the West Bank.
There is already one monopoly mobile operator in Palestine, Jawwal, owned by Paltel, but the prospect of a second operator raises hopes of potentially cheaper and improved services, and equally important, a choice of mobile providers.
O’Mulloy witnessed the heightened interest in the new provider on his trips to the West Bank: “I went out with Wataniya (WPT) sales representatives visiting Hebron, Bethlehem, Ramallah, and Nablus. And after 12 months work, the Wataniya Palestine Telecom guys had come to know every owner of every mobile phone shop as we walked through the cities and towns.
“Everyone was asking when they are going to open, as they were keen to start selling the mobile cards. There was clearly immense excitement that had been generated by sales staff about the arrival of a new mobile operator.”
Future of emerging market business
Yet, in spite of the precedents set by this deal for structuring emerging market transactions, O’Mulloy expresses concerns that the wider global economic downturn might bring a halt to these kinds of projects.
“We are seeing a dramatic reduction of foreign direct capital flows to emerging markets this year. I am concerned that it will be exactly transactions of this type that will very easily drop off the list as banks move into an increasingly protectionist era and retreat into their own markets,” he explains.
“I do believe that one year on, this transaction would have been harder to get approved at Standard Bank than when we got it approved because of the credit crisis. “All banks are facing the same problems, new deals now have to be strategic and the client has to be tier one. It is a concern for all high risk emerging markets that lack strong internal banking systems. It is not easy for them to understand why they are being affected by a crisis in the US and Europe.”
Although this transaction has helped to open up the Palestine banking sector to international markets and has supported the establishment of a new large corporate in the region, it is likely the credit crisis is not going to make it any easier to sign other major deals in Palestine.