While multi-billion dollar equity deals have been the talking point of the Indian telecom sector, there seems to be a growing dependence on the debt market as well. Both public sector and private sector telecom companies have had to visit the debt market to meet their huge capex needs.
Apart from commercial loans, other means of debt financing such as external commercial borrowings (ECBs) and foreign currency convertible bonds (FCCBs) have also emerged as popular sources of debt, following a policy liberalisation.However, the bond market, which currently accounts for a small portion of the sector’s debt funding, needs to be developed to sustain the industry’s long-term financing needs. tele.net takes a look at recent debt financings in the telecom sector…
Scheduled commercial banks
While the debt market in India is dominated by domestic commercial banks, the telecom industry is more dependent on big multinational financial institutions, partly because the sector is privatised to a large extent. However, given the nature and size of investments required, the loan amounts raised from scheduled commercial banks have been growing every year.The gross credit outstanding by scheduled commercial banks to the telecom sector has grown at 13 per cent annually during the period 2003-04 to 2008-09.
In April 2009, the State Bank of India (SBI) agreed to lend Vodafone Essar Rs 100 billion. The five-year loan carries an interest rate of 13.25 per cent for the first two years; thereafter, it will be re-adjusted on the basis of the average prime lending rate of four public sector banks ?? SBI, Punjab National Bank, Canara Bank and Bank of Baroda. Vodafone Essar is planning to use about Rs 60 billion to expand its network and to prepay part of its previous debt. The company has debt amounting to Rs 100.4 billion on its books as of March 2008, so the fresh borrowing will take its combined loan exposure to Rs 200.4 billion.
ECBs and FCCBs
International lending institutions have been fairly aggressive in extending loans (in the form of ECBs) to Indian telecom companies. The increased mobilisation of funds through the ECB route is partly on account of a liberalised ECB policy and partly because ECBs are a relatively cheap source of finance as compared to domestic bank credit. ECB loans typically carry an interest charge that is linked to Libor and a credit premium over Libor. Some of the active international banks and institutions involved in telecom infrastructure financing are Standard Chartered Bank, the International Finance Corporation (IFC), Citigroup, the China Development Bank and the Export Development Corporation (EDC) of Canada.
In December 2008, the telecom sector raised a total of $460 million through the ECB route, the highest amongst the infrastructure sectors. Two of the top three external commercial borrowers were telecom companies. Shyam Telelink (now renamed Sistema Shyam TeleServices) was the highest borrower ($310 million), followed by Kiri Dyes and Chemicals ($261 million), and Reliance Communications (RCOM) ($150 million). Shyam Telelink raised this money as a rupee expenditure line of credit for capital goods.
In December 2008, RCOM received $150 million of the $500 million loan facility signed by it with EDC in July While the debt market in India is dominated by domestic commercial banks, the telecom industry is more dependent on big multinational financial institutions, partly because the sector is privatised to a large extent.2008. The company is using the funds for purchasing GSM equipment. The loan has reportedly been procured for a seven-year period at an interest rate of Libor plus 1.
Earlier, in May 2008, RCOM obtained a loan of $750 million from the China Development Bank for a period of 10 years at Libor plus 80 basis points. The proceeds of the loan were invested in building the company’s nationwide GSM network. A large part of the funds was to be used to fund RCOM’s plan to buy GSM electronic equipment from Huawei. The loan gave a significant advantage to the company’s GSM foray as it had a longer tenor of three-four years and was around 50 basis points lower than any other option available at the time.
In September 2008, IFC, an arm of the World Bank, lent $100 million to Idea Cellular to expand availability of affordable mobile telephony services in the country. IFC and Idea Cellular are developing a project that will establish pocket public calling offices to deliver mobile communications and other value-added services to underserved rural communities and the urban unconnected poor in the country.
The incidence of FCCBs too has increased. In December 2008, the Reserve Bank of India (RBI) permitted companies to buy back FCCBs if they were trading at a discount of 25 per cent of the book value.Thus, in April 2009, RCOM bought back FCCBs amounting to a face value of $24.7 million from foreign investors for $21 million (at a 15 per cent discount). Prior to this, the company bought back 50 zerocoupon FCCBs from the international markets, aggregating $5 million.
Other sources of debt
The share of non-banking finance companies (NBFCs) and FIs in the total debt market has grown rapidly over the past few years owing to their focused business models and deep knowledge of the infrastructure sector. While there are several specialised NBFCs ?? such as IL&FS, IDFC, Srei Infrastructure Finance and L&T Infrastructure Finance ?? that have been financing the infrastructure sector, as far as the telecom sector is concerned, IDFC has been the most involved. The telecom sector accounted for 11 per cent of IDFC’s total lending approvals during the year ended March 2009.
A new form of financing that is developing in India is equipment vendors tying up with banks to finance mobile operator projects. Chinese telecom equipment major ZTE has, for example, tied up with the China Development Bank for financing mobile operators for up to $3 billion for network rollout. This will help ZTE to not only compete with established European players like Ericsson and Nokia Siemens Networks but also to corner market share in the fastest growing telecom market. “We have signed an agreement with the China Development Bank for loans of up to $15 billion. About 20 per cent of this ($3 billion) will be used for Indian operations,” says Dr D.K. Ghosh, president and MD, ZTE Telecom (India).According to Ghosh, most of the new operators as well as existing players are finding it difficult to finance their huge investment needs. ZTE can help them by part-financing their network rollouts.
Future deals
Several other telecom funding deals are in the pipeline. Bharti Airtel has reportedly received a commitment from Standard Chartered Bank to raise a $4 billion bridge loan to finance its deal with MTN. The bank has agreed to fully underwrite Bharti’s net acquisition cost. However, it has not yet been decided whether the UKheadquartered bank will put together a syndicate to finance the deal. There is a strong possibility that a clutch of foreign banks will participate in the loan syndicate, should one be set up.
The proposed $23 billion Airtel-MTN deal will see both companies offering equity stakes and cash to each other. Airtel would have to make a net cash payment of around $4 billion to acquire 49 per cent stake in MTN, which, in turn, will pick up a 36 per cent economic interest in the Indian operator.
All in all, it is clear that while the current global credit crisis has had an impact on debt markets across verticals, the effect has been less visible on telecom companies in India as the sector continues to remain attractive to foreign as well as to domestic lenders.
Key financings
