Norton Rose Fulbright is one of the first legal practices to observe the trend for the transfer of tower assets from MNOs to towercos in emerging markets, leveraging excellent relationships with the operators and banks contacts to secure many of the early mandates in African towers. More often found advising operators selling towers and lenders to towercos, Norton Rose Fulbright has advised on tower transactions involving Eaton, Helios Towers Africa, Helios Towers Nigeria and IHS across Africa and advised Tower Bersama on a transaction in Indonesia. They have also advised ABSA on the financing of Cell C for their landmark acquisition deal with American Tower, advised Vodacom Tanzania on their deal with Helios Towers Africa, and advised Etisalat on their recent deal with IHS in Nigeria. Having recently gained offices in Colombia and Venezuela, as well as opening in Rio, the firm stands ready to advise on tower transactions in South America. Key contacts for towers include Oliver Stacey for operator disposals and Daniel Metcalfe for finance.
TowerXchange: First, please introduce Norton Rose Fulbright and your experience in advising on emerging market tower transactions.
Oliver Stacey and Daniel Metcalfe, Partners, Norton Rose Fulbright:
Norton Rose Fulbright is a global legal practice with a full business law service. We have a first rate telecoms and technology practice, including both corporate and finance capabilities across the globe. We have significant experience of advising on tower based transactions across the value chain, from advising operators on disposals through to advising lenders on acquisition and development financing arrangements for tower companies. We have particular experience in Africa and Asia, and our offices in South America, including Brazil, mean we are well positioned in relation to the burgeoning South American towers market.
TowerXchange: With the ever-increasing appetite of private equity firms to invest in emerging market towers, it seems that attracting long term debt finance remains the more challenging element of raising capital. Is there an established pool of lenders who arrange and lead debt finance?
Oliver Stacey and Daniel Metcalfe, Partners, Norton Rose Fulbright:
Provision of long term debt finance remains more limited across sectors post 2008, and telecoms is no exception. However a robust security package underpinning strong economic fundamentals of a tower operating company can attract finance from established lending institutions. Indeed the majority of the Africa towerco acquisitions over recent years have been financed by a combination of private equity capital and third party debt finance. Tenors will vary depending on the economic fundamentals and modelled revenue profile, however long term amortization profiles have been provided.
There is an established pool of lenders for Africa finance, which is led by Standard Bank, Standard Chartered Bank and IFC, although Ecobank and others are becoming more visible and active. The tower financing model is a relatively bespoke one in Africa, although well established in other markets and becoming much more so in Africa as the business model itself develops. As the number of deals increases, as the tower companies themselves establish an effective and proven business model, and as a track record of performance in terms of existing financings develops, we would expect the pool of institutions and available finance to expand. Certainly with the current spate of disposals taking place across Africa there is a need for other institutions to help shoulder the debt burden.
There is an established pool of lenders for Africa finance, which is led by Standard Bank, Standard Chartered Bank and IFC, although Ecobank and others are becoming more visible and active
As the model gains traction in other emerging economies, such as South America and Myanmar, we will see specific lender pools developing for these jurisdictions. Often development finance institutions such as IFC will be at the forefront of financings in these frontier jurisdictions, but we would also typically expect to see a commercial bank appetite and particularly in South America where there is a strong and developed finance market with both local and international institutions active.
TowerXchange: How do the criteria for a debt investor differ from those of a private equity investor?
Oliver Stacey and Daniel Metcalfe, Partners, Norton Rose Fulbright:
In terms of the basis on which private equity investors and debt investors are willing to commit funds to a tower company, their criteria are in many respects aligned. They both want to have their debt or investment repaid over time, with an adequate return, and have a smooth and efficiently run compliant operating business.
However, their interests do vary and these will conflict during negotiations. For example a private equity investor will want to preserve an unfettered ability to exit, whereas a debt provider will want to restrict any change of control over the towerco for various reasons including regulatory, reputation, support and experience.
A debt investor will be more risk averse than a private equity investor, so will typically require a fixed repayment profile and security for the same. Their returns (fees and interest) are fixed. An equity investor has no fixed repayment terms (subject to the terms of any equity invested through debt instruments) and no security, but equally has significantly more upside potential on return or exit. Debt funding of a towerco is typically provided on limited recourse terms, without contractual recourse to any equity investors, and a corollary of that is that lenders will typically require any shareholder debt to be subordinated to the debt facilities.
Lenders will also typically impose restrictions on upstreaming of cash from the operating business, by way of dividends or otherwise. This obviously conflicts with the preference of equity investors at the top.
An equity investor will require more management control, such as board seats, consent rights and ability to appoint certain executive management. Whilst debt providers will require certain controls and restrictions on business, they will fall significantly short of dictating terms of the day to day running of the business, with adverse persuasions from a logistical perspective but more paramount concerns over shadow directorship.
TowerXchange: What’s the difference between the terms under which debt may be provided by a commercial lender versus a Development Finance Institution?
Oliver Stacey and Daniel Metcalfe, Partners, Norton Rose Fulbright:
DFI and commercial lending terms will largely be aligned, and indeed that will need to be the case in a combined financing structure. However, there can be variations to sensitivities which are then reflected in the funding terms. For example, whilst all lenders are sensitive to environmental and social risks, this is a particular concern of DFIs and they have very strict and detailed requirements in this regard, in terms of compliance and information they expect to receive.
DFIs will also have strict requirements relating to sanctions and corrupt acts, however these provisions have moved very much to the forefront of commercial lender concerns and as such there is considerable alignment in the current market.
A DFI may also be willing to lend on longer tenors.
It will inevitably be more difficult for a less established towerco to raise finance. Local lenders will most likely be the best source of funds in the initial stages, but as the debt requirements increase, competing with larger and more established towercos in the international debt market will prove difficult
TowerXchange: How should the debt finance raising strategy of an established towerco, seeking acquisition finance for another sale and leaseback deal, differ from the strategy of a newer towerco, perhaps with a few build to suit towers, which had out grown the capacity of local lenders?
Oliver Stacey and Daniel Metcalfe, Partners, Norton Rose Fulbright:
It will inevitably be more difficult for a less established towerco to raise finance. Local lenders will most likely be the best source of funds in the initial stages, but as the debt requirements increase, competing with larger and more established towercos in the international debt market will prove difficult – a commercial lender will almost invariably prefer to support a larger more established towerco, with a proven track record.
In order to attract international debt, a smaller towerco will need to consider the incentive package such as higher pricing and fees, more security and equity support, more up front equity and opportunities for ancillary business such as account management and hedging. They might also consider approaching international lenders with a lead arranger mandate but bringing their local relationship lender in support for the debt, so as to reduce the total exposure risk on the international lender group. DFI/IFI institutions may also prove a useful source of funds.
As towercos develop their portfolio and diversify over time, they are able to negotiate better borrowing terms both in relation to pricing but also other flexibilities on general business operations. The lenders may also be willing to adopt more relaxed positions in terms of security, but equally if the towerco is willing to offer a diversified security package then this risk mitigant may enable them to obtain better pricing from lenders.
