NEW YORK-Telecommunications projects overseas, while exceedingly complex, follow the simple tenets of an old adage: Education is what you get when you follow the rules; experience is what you get when you don’t.
“The aspect that bedevils many and generates lots of legal fees is complexity due to the number of participants,” said Glenn S. Gerstell, a partner of Milbank, Tweed, Hadley & McCloy, a Washington law firm. “But the minute I mention complexity, people often leave and head for the water cooler.”
Diversification of expertise and of risk, “especially on the equity side,” is a key reason for complexity, according to Gerstell. Equity plays a larger role in telecommunications ventures abroad than is typical in project finance generally, said Laura Koffler, a director of Standard & Poor’s Corp. project finance group, New York. A normal debt-to-equity ratio in project finance is 70: 30, whereas during the initial development phase of an overseas telecommunications projects it is 50: 50, she said.
“It could be that the companies involved are more established and have a greater scope for corporate financing, or that sometimes the perceived risk requires more equity,” Koffler said.
Lenders, including bond holders, look to see that, “a project owner has a significant equity stake because they (the equity participants) are more likely to bail out the project if it gets into trouble,” she said.
Gerstell and Koffler spoke March 26 at a conference, “Project Finance for Telecoms in Emerging Markets,” sponsored by the Institute for International Research, New York.
Although conceding that their advice might sound self-serving, Gerstell and Koffler recommended that companies interested in a telecommunications venture abroad seek legal and rating agency advice while their plan is in its early brainstorming stages-when there still is time to avoid the many pitfalls waiting to snag the unwary. In the longer run, doing so will prove less expensive, they said.
A consortium on the equity side, rather than a single equity investor, often is a government requirement, as is the case in Taiwan’s recent cellular license awards and those pending in Brazil. Each of the many project participants will bring a unique perspective to the bargaining table that, more likely than not, will conflict to some degree with priorities of the other players.
“Equity participants take a long-term view and probably are the most willing party to take speculative risk,” Gerstell said. “But they also want to protect their dividend stream, have a need for flexibility, want [the business] to expand and are looking for an exit strategy. This is often antithetical to [the views] of the other project participants.”
Asked if he had ever experienced a case where the equity participants sought to exit a project, Gerstell replied this way: “I’m thinking of one cellular project that hasn’t earned anywhere near what was expected, as is often the case when you are so dependent on market acceptance of a new [service].
“Perhaps in their heart of hearts, they want to get out, but they haven’t asked to, and have implicitly lengthened their time horizon for profits.”
In countries like Thailand, which recently granted cellular licenses to its two fixed line telecommunications carriers, another area of concern involves the impact of the new business on the bottom line of the existing business. Additionally, outstanding creditors of the wireline business likely will resist sharing repayment collateral pledged to them with new lenders to the wireless enterprise of the same companies.
“There can be no single answer, but these issues have to be addressed and up front,” Gerstell said.
Reluctantly, but out of necessity, equipment vendors have become major creditors to telecommunications projects abroad to which they wish to sell their products. However, on the wireless side of telecommunications, there often is the benefit of comparative simplicity so that one vendor doesn’t have to establish a pecking order with another in terms of management and/or repayment priority.
“Most telecom projects haven’t been turnkey so there is a role for multiple contractors,” Gerstell said. “Turnkey has been true more often in cellular projects, which tend to be a bit smaller than laying fiber optics or copper.”
Pecking order does come up in several other aspects of telecommunications projects arrangements.
“In India, (for example), the requirements in bidding rules for cellular and fixed line licenses are for the project operator to be Indian controlled,” Gerstell said. “In many cases, the local partners are without capital or operating expertise, but there are some ways to bridge the gap.”
Among those options are to make the chief operating officer a designee of the foreign operator as a means to give the outside company as much technical and operational control as possible. Another way is to require consent of the foreign operator for approval or termination of major contracts and equipment orders.
“I haven’t come across any projects where this issue is perceived as so difficult by the lenders and equity participants that it can’t be resolved satisfactorily,” Gerstell said.
One key mistake to avoid, however, is the egalitarian set-up of a 50: 50 joint venture in which either party has veto power over the other. Such a structure, which is a prescription for project gridlock, is a sure way to turn off American government export credit and multilateral development agencies that provide loan guarantees and political risk insurance.
