How are Asian towercos and MNOs reacting to COVID-19?

Back in the 70’s, the International Finance Corporation (IFC) entered Asia’s telecom landscape by supporting PLDT’s expansion in the Philippines. Five decades later, it has become the region’s largest developmental institution and is set to continue playing a critical role in supporting the rollout of digital infrastructure to secure connectivity across Asia’s most challenging markets. TowerXchange caught up with IFC’s Chief Investment Officer, Carlos Katsuya to discuss the impact of COVID-19 in the industry and explore what are the most investible markets and new streams for towercos in Asia.

TowerXchange: Although most of our readers are very familiar with the International Finance Corporation and your role in telecom, could you please re-introduce the organisation and your engagement with the Asian telecom infrastructure industry?

IFC—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. When people hear World Bank Group, they usually think about the International Bank for Reconstruction and Development (IBRD), which provides financing and advisory services to Governments in emerging markets. The reality is that IFC, a sister institution of the World Bank, focuses on the private sector of emerging markets. IFC has played an increasingly significant role in those emerging markets, as it is clear that the private sector is absolutely needed to close the gap between developing and developed countries. With more than 60 years of experience and presence in over 100 countries, we are now the largest investor in emerging markets.

In telecom, our first investment was in 1970 in the Philippines. Since then, we have invested in mobile operators, tower companies, data centres, satellite and subsea cable, retail and wholesale broadband companies. In summary, we work closely with the entire telecom ecosystem and we have had a massive impact in some of those markets. For instance, we were among the early day-shareholders of companies such as Bharti Airtel in India and Grameenphone in Bangladesh, at a time when most people thought that mobile telephony was something for rich countries. We believed in the developmental potential that mobile communications could bring to some of the world’s most challenging countries— and the amazing performance of these companies as well as the development and innovation seen in those markets have proved us right.

TowerXchange: How is IFC different to other investors such as private equity players and commercial banks and what are your goals and priorities?

First, let’s talk about what we have in common with PE firms and commercial banks: we can provide equity and debt financing as they do.

The differences are many. Usually companies go to PE firms when they need equity and to commercial banks when they need debt. As we can provide both, and anything in between, clients can come to us for anything that they need. We will structure our products, from senior secured debt to common equity, or some sort of mezzanine instrument, based on the company’s needs and the risk that we take. Another important difference is that, as part of our mission, all of our investments need to have a developmental impact in the markets where our clients operate. We are not here to compete with the PE firms or commercial banks. We are happy to work with all of them, adding value to our clients through our experience in emerging markets, industry knowledge and willingness to take risks that those other lenders and investors may not yet be prepared to take.

TowerXchange: You have an extensive experience financing and working with MNOs in Asia. How have they been impacted by COVID-19?

Compared to other sectors, telecom has been relatively insulated from the COVID-19 crisis, as reliable connectivity has become critical for home-working, home-schooling, shopping and national crisis management systems. However, that does not mean that the sector is immune to the economic downturn and its impact on consumers’ purchasing power. Mobile operators are probably the hardest hit within the telecom ecosystem, especially in emerging markets. We have seen some of our clients having significant revenue decrease despite the huge surge of data traffic in their networks as many MNOs have not being able to monetise that increase in traffic, either because of promotions or all-you-can-eat type tariff packages. In addition, in some markets, pre-paid customers still mostly use scratch cards to add credit to their phones. The lockdowns have prevented those clients from re-charging their phones, which has also impacted the top line of some MNOs. Another impact on MNOs has come from network rollout delays, either because they have not been able to import equipment, they have not got the necessary permits, or their suppliers have been unable to provide the services that they needed. Such reduced capex could have an impact on future growth as well.

TowerXchange: What are some of the main risks that this pandemic pose for the tower industry in Asia and how are towercos responding?

I think the biggest risk for towercos would be a widespread financial impairment of the MNOs. As I mentioned above, some of the MNOs are seeing an impact on their revenue, especially those located in the most challenging markets. I would not be totally surprised if some of those MNOs reached out to their suppliers, including towercos, asking for discounts or deferred payments. Besides this more immediate impact, there is also the risk of cutting growth prospects for the next 12-24 months, especially if MNOs continue to face challenges in importing equipment and obtaining local permits. Despite these issues, I expect the demand for services will continue to increase. Volume and geography of data usage is shifting, from office to home, with more video consumption and other services. The networks will be congested and there should be demand for more towers and fibre. In this sense, towercos should continue to explore expansion of their business models, such as DAS, small cells and fibre. 

TowerXchange: What is IFC’s appetite for telecom infrastructure and what are some of the most attractive markets in the region?

IFC remains fully committed to the Asian telecom sector. Actually, we believe we have an important counter-cyclical role to play – we should step in and be more proactive when the rest of the market retracts due to perceived risk increase. We are working on several initiatives, many of them in coordination with the IBRD, to support our existing and new clients who have been impacted by the COVID-19 outbreak. We continue to be fully open for business despite working from home.

In terms of main markets in the region, we see interesting opportunities in the Philippines, Bangladesh and Pakistan. The entry of a third MNO and the Government’s effort to promote infrastructure sharing in the Philippines could bring much needed service quality improvement in that market. Bangladesh and Pakistan have several MNOs and are relatively new markets for towercos. 

TowerXchange: We have seen regional leaders such as Indus Towers, Protelindo and edotco going beyond towers and exploring new streams. How is the towercos business model evolving in Asia and what will be the financial implications of that evolution?

Towercos should be solution providers, so it is natural that their business model evolves and they explore new avenues. I think the most immediate expansion of the model will be towards small cells and DAS, which may put a bit more risk in as the venues that host this type of equipment could face financial difficulty, with a potential impact on the quality of the security. 

TowerXchange: How is the industry adapting to the imminent arrival of 5G in the region and how can towercos, MNOs and investors better prepare for this transition? 

I think the biggest issue and opportunity for towercos with the arrival of 5G will be how they decide to answer to the densification challenge. Some towercos may have to look for new partnerships, as they will need to deal with quick distributed deployments in urban areas, including the need to fiberize a large number of sites. From an investor perspective, we see 5G as an opportunity whose benefits will probably still be more limited to the developed markets in a first moment but, as in previous technology transitions, we expect emerging markets to leapfrog some steps quickly.