NEW YORK-“Much to the shock of my sales team, vendors are not partners with an equity
stake in carriers, and loans are not investments without repayment expectations,” Leslie L. Rogers said at
International Business Communications’ recent Wireless Finance ’98 conference.
“It’s not just, ‘By gosh, are
they going to buy equipment?'” said Rogers, who is managing director of North American customer finance for
Lucent Technologies Inc., Murray Hill, N.J.
At the same time, the fact that it now is common for carriers to seek
equipment vendor financing has made this type of practice a competitive tool in garnering carrier
customers.
“Vendor finance usually is the lender of last resort for start-up green field wireless carriers,
although we do finance prime grade companies, like [regional Bell operating companies] and long-distance carriers,
with subsidized loans,” Rogers said.
Lucent has made hundreds of billions of dollars in loans to
telecommunications services companies and has a few billion dollars in such loans outstanding now, she
said.
“Vendor financing is not easy credit, inexpensive money or replacement equity,” Rogers
said.
“We try to fashion … loan documents that look like commercial loans because we look to sell these loans
to third parties. The liquidation value of individual components is far less than a functioning network, so we and the
banks want to see a big bow tied around the network.”
In some cases, Lucent has lent its own staff for
extended periods of time on site to help get the networks it has provided up and running, she said.
Another knot in
the big bow tied around the network is using as collateral some of the stock of the radio-frequency license holder.
While licenses can’t easily change hands, stock can, she said.
However, Rogers stressed that, as a spinoff of AT&T
Corp., Lucent is precluded from taking an outright equity position in its customers. Even if it were not banned from this
practice, she said, “Doing so would be a dangerous precedent and opens a Pandora’s box.”
Equipment
manufacturers are operating under several external constraints in their ability to lend money to
carriers.
“These will bore you to tears, but they are very important for us,” Rogers said.
The first is a
new rule, No. 125, that the Financial Accounting Standards Board has imposed. It says if a company like Lucent lends
money to a customer that has no other income source, then the vendor must delay equipment sales revenue recognition
until the customer pays it or the loans are sold to a third party.
An international banking rule established a decade
ago “makes banks treat unfunded commitments as though they were loans outstanding, therefore making our
financing with extended draw-down periods undesirable and unprofitable for banks to purchase,” Rogers
said.
Furthermore, credit rating agencies view vendor financing of customer purchases as risk assets that can lower
the equipment manufacturer’s credit ratings, thereby increasing its cost of capital. These higher costs then get passed on
to customers.
