NEW YORK-Equipment vendors, `maxed’ out from lending money so carrier customers can afford their network infrastructure, are finding a solution-not to say salvation-in elaborate lease arrangements to lay off debt.
To the uninitiated, the individual strands of these financing arrangements seem more complex than a DNA molecule. But the result is removing carrier customer debt from vendor balance sheets by finding other parties that gain tax and other advantages by taking it on through lease arrangements for capital equipment.
The genesis of the problem for vendors is itself an apparent paradox.
The telecommunications market is growing rapidly worldwide. One would think, therefore, that a seller’s market would result. The reverse so far has been the case, largely due to the startup development stage of the new carriers.
“The wave of privatization and deregulation in the last 10 years and the explosion in telecommunications that resulted has led to an explosion in competition among vendors for business,” said Richard Gray, a partner in the corporate and banking department of Milbank, Tweed, Hadley & McCloy, New York. He spoke at a conference Nov. 18 on Cellular, Wireless and Cable Finance, sponsored by IBC USA Conferences Inc., Southborough, Mass.
“There is pressure to remove customer debt from balance sheets by selling loans to institutional investors, which have to absorb risks not palatable to them.”
Borrowing a page from the aircraft and railroad industries, the telecommunications industry has embarked on various lease arrangements of major capital equipment, like satellites and cell sites, to third parties, Leonard Shavel said. Shavel manages cross-border financing of large-scale telecommunications and other assets for Babcock & Brown, Greenwich, Conn.
“In telecommunications, the Europeans are using cross-border leases as part of vendor financing packages, and we will see more and more of this,” Shavel said.
The unifying rhythm of this finance dance, which has many intricate steps, is that foreign investors buy a large capital asset, like a digital switch, and lease it back to a carrier in another country. The tax benefit for the lessor comes in the form of large rental deductions, as opposed to direct tax deductions.
“The market has been explosive. There has been about $30 billion of financing (by American investors) of rolling stock, real estate and other long-lived assets,” Shavel said.
“But there are rules that have been pending for the last 18 months that would change all that.”
If the United States’ tax code puts a crimp on this type of financing, it wouldn’t be alone. The policies of countries like Belgium, Denmark, France, Germany and Sweden generally discourage the use of their domestic tax base through federal tax deductions to finance overseas projects unless the infrastructure itself is a home-grown product.
Next to U.S. investors, the Japanese investment community has been the most active in certain forms of cross-border leasing for telecommunications infrastructure.
“The Japanese export a lot of capital to countries they export a lot of goods to,” Shavel said. In particular, personal communications services networks in this country have benefited from leveraged leases financed by Japanese investors, Shavel said.
In this type of lease, a bank, insurance company or other lender typically puts up 50 percent or more of the cash needed to buy the fixed asset. The lessor, serving both as equity participant and borrower, gets a mortgage from the lender on the acquired asset, which he leases back to the carrier. The lender gets the lease payments. The lessor gets tax deductions for depreciation on the asset and interest on the mortgage.
“The lessor is the real hero who provides the tax-based equity.”
