Eur575m Debt Package For 3G Network

Europe : Positive news relating to third generation (3G) mobile services has certainly been few and far between but on July 28, Portugal’s third-largest mobile operator Optimus finally secured the long-delayed financing for its 3G network.

After a year in the making, ABN Amro, BNP Paribas and SG signed a Eur575m debt package for Optimus, the first 3G-related non-recourse financing to come to the markets since Hutchison’s H3G transaction in Italy early last year.

The three banks were originally mandated to arrange a Eur900m package in 2002 to refinance previous facilities and fund a UMTS network but the original deal was pulled because of a restructuring in the Portuguese telecoms market and discomfort felt by banks at the risks to be taken on.

Portuguese telecom regulator Anacom awarded four 15-year UMTS licences in December 2000 to four operators: Vodafone Telecel, Portugal Telecom’s TMN, Optimus and new-entrant OniWay. Last year, OniWay decided to exit the market after failing to secure revenues from traditional GSM operations because of complications in sharing the incumbents’ networks. Its licence was subsequently revoked and its spectrum split equally among the remaining operators.

With OniWay now out of the picture and the official launch of Portugal’s UMTS network delayed from January 1 2002 to the end of 2003 at the earliest, a reassessment was required.

Speaking to BNP Paribas, it as clear that both developments were very positive. The market was now stabilised with three players, mitigating the risk of heavy competition from a new-entrant in the market and the delay in the UMTS launch allowed for a longer period of positive cashflows to support network development costs. Certainly without a new entrant spending heavily on a 3G network, the pressure to invest for incumbents was reduced.

Banks were also unease at funding the previous larger deal. Dexia, which participated in both deals, also confirmed that there was unwillingness in the bank market to take on the greater risks in the larger deal.

But the outlook for the Portuguese telecoms market was still positive. Banks considered the market sophisticated and one of Europe’s leading adopters of new technology. Sim card penetration is over 90% and data calls make up an increasing portion of consumer bills, a key indicator of the market’s appetite for 3G services. Optimus is also one of the best third-entrant operators in Europe with four-and-a-half years of activity.

Helped by stronger than expected cashflows from its GPRS network during 2002 and a capital increase from shareholders, Optimus reduced its financing requirements to match the changing timeframe for the network launch and its new competitive environment. A new Eur575m loan was tabled at the end of 2002 that would provide around Eur400m for outstanding debt and make the remaining Eur175m available to support build out of the UMTS network. The new structure allowed banks to mitigate their exposure to unpredictable future 3G cashflows through an amortization profile principally relying on 2.5G revenues to pay back debt. A conservative banking case that was very strong in its capacity to receive downside scenarios, minimised the relevance of future data revenues in paying back the loans.
The debt package was split between three tranches carrying eight-year tenors: tranche 'A' is a Eur263m amortising term loan; tranche 'B' is a Eur237m EIB guarantee facility; and tranche 'C' is a Eur75m revolver. All tranches pay a margin of 225bp for the first 12 months, after which pricing is linked to a leverage grid with a floor of 75bp.
Four tickets were on offer at syndication launch in May 2003: mandated lead arrangers taking Eur60m for 200bp, lead arrangers taking Eur40m for 150bp; arrangers taking Eur25m for 125bp; and co-arrangers taking Eur15m for 100bp.

The response from credit committees at the participating banks was positive. Banks were impressed that debt/ebitda was below three times at closing and a tight covenant package was in place.

With such attractive terms and 3G risks largely mitigated, it was no surprise that the deal was oversubscribed, raising Eur100m in addition and leaving final commitments to be reduced accordingly. The bank group for the new deal was also cut by the exit of participating institutions from the Eur900m deal: IntesaBCI, Mediobanca, Enteniel, Hypovereinsbank, LBRheinland-Pfalz and Caja Madrid.

The three main Portuguese institutions, BCP-Banco de Investimento, Caixa Geral and Banco Espirito Santo (BES), were involved from the outset and took the top titles. Dexia, ING and Royal Bank of Scotland were also strong supporters and all took mandated lead arranger tickets, while Spain’s BBVA and Credit Lyonnais bought lead arranger tickets alongside BES. The remaining participations are held by CIC and Natexis Banques Populaires as arrangers and KBC and BPI as co-arrangers.

The inflated titles and the large participation fees on offer were largely expected for a 3G-related transaction given the limited number of banks supporting telecom deals compared to a few years ago.

Signing took place on July 28 after a drawn-out documentation process typical given EIB involvement. Optimus was advised by Baker & McKenzie and NM Rothschild, while the banks were advised by Clifford Chance. Ericsson and Nortel are supplying the UMTS equipment.

Optimus is the fastest growing mobile operator in Portugal and has been established since September 1998. Its principal shareholders are Sonae (45%), Luxembourg-based investment group Thorn Finance (25%), France Telecom (20%) Maxitel (5%) and IPE (5%).