Why development finance is a great fit for towercos in frontier markets

TowerXchange have spoken to many tower entrepreneurs who are struggling to access capital to scale their business. Perhaps the portfolio is too small to attract the commercial banks. Perhaps there is too much country risk. Sometimes development finance can bridge that gap. DFIs can also be a long term business partner for towercos small and large. Of the plethora of DFIs with an appetite for towers, the IFC are perhaps the most experienced. In this interview, TowerXchange spoke to IFC’s “tower guy” Eric Crabtree to understand their appetite for this asset class.

TowerXchange: Please introduce our readers to the IFC and specifically to your engagements with the telecom tower industry.

The International Finance Corporation (“IFC”), a member of the World Bank Group, is the largest global development institution focused on the private sector in developing countries. IFC has an invested portfolio of approximately US$52bn, US$2bn of which is in telecommunications and technology. Since 2009, IFC has committed approximately US$500mn in equity (40%) and debt in eight telecom tower companies across all major emerging market regions. See figure one.

IFC strategy in the sector is to build our portfolio in the towers segment to approximately US$1bn by end of Fiscal Year 2018. We seek to fund independent (not controlled by operators) tower companies in growth markets serving multiple viable MNOs and in markets with few competing tower companies.

We see four broad areas of opportunity:

(i) Equity and associated debt for tower companies entering new markets, typically through the first/second divestiture of existing MNO tower assets;

(ii) Equity and associated debt investments in smaller firms in maturing tower markets who have strong build expertise;

(iii) Large tower market consolidations that promote an independent and efficient sector; and

(iv) Debt and some second/third round equity investments in mid-tier tower companies seeking moderate portfolio acquisitions combined with build to suit.

TowerXchange: Please could you introduce the ecosystem of development finance, again particularly in relation to DFI’s engagement with the tower industry.

Development Finance Institutions (“DFIs”) have been very active in the tower sector in emerging markets, including FMO, DEG, CDC, Proparco, OPIC, BIO and OFID.  DFIs in recent years have developed common approaches to their requirements, streamlining joint investments. For example, a common terms agreement has been developed that simplifies documentation. It is also true that it is the common mission of the DFI’s to serve underserved markets, and this pushes our institutions into riskier markets and more longer term risk in financing structures. The tower industry, given its ability to extend communications access, has a strong development impact, and thus is a priority for development institutions.

TowerXchange: Can you talk about the evolution of a towerco finance from a towerco’s first couple of hundred towers to scaling the business (whether in one market or several) – how does the capital structure evolve and how can the IFC support that evolution?

As tower companies grow in scale, increasing amounts of longer term debt finance can be used for expansion. For the smallest firms, we have supported equity only investments, for mid-sized firms undertaking scaled acquisitions or build to suit, we have supported 50/50 debt to equity. As firms mature, debt can become the dominant form of capitalisation and capitalisation structures can become a bit more aggressive than the less mature tower companies. This is because mature tower companies have demonstrated the strength of stable lease rates and long term contracts. We also find that for younger firms, mezzanine finance that has favorable repayment profiles and a performance based return, can be attractive for clients with limited equity capital but are seeking to scale up quickly.

TowerXchange: Is there a lower limit in terms of the cheque size or the scale of towerco in which the IFC has an appetite to invest? 

There are no formal lower limits to the size of IFC’s investments.  For equity investments, we prefer to invest at least US$10mn, although we have made smaller initial investments that have considerable scope for expansion.  For debt investments we prefer cheque size to be at least US$15mn.

TowerXchange: How would you characterise the IFC’s appetite for country risk? 

IFC is increasingly geared toward what we call “frontier” markets where access to patient capital is limited. In a sector such as towers, capital investments are significant and payback periods are relatively long. In many markets, such long term capital is very limited.

TowerXchange: The perception is that development finance takes a lot longer to secure because of the extensive due diligence undertaken and ethical and environmental obligations which aren’t in themselves necessarily onerous, just time consuming to prove compliance. Is that a fair perception?

It is true that development institutions such as IFC have high ethical and environmental standards. The approach we take on our requirements is constructive, and we allow firms the necessary time to come into compliance, with for example, environmental standards.  We also believe that our clients benefit from these standards in terms of their reputation and the efficiency of their operations.  At exit, for example, our presence can assure buyers of the firm’s standards.

In terms of the other elements of the financing, I have found that IFC works at the same pace as other commercial parties, sometimes outpacing them. For example, if the client is ready, information is available and negotiations don’t take long, we have been able to close transactions from mandate letter to commitment in three months.

TowerXchange: Are there taxation advantages to working with development finance?

Yes, these advantages can be important to our clients. For example, interest and dividends payable to IFC are exempt from withholding taxes under our treaties with member governments.  In any countries such withholding taxes can range from 10-20%.

TowerXchange: Please summarise the difference between the IFC and commercial banks/private equity firms as a debt/equity partner.

There are several key differences of importance to our clients. First, we can provide the full range of financial instruments, from debt to equity, providing maximum flexibility to tailor financing packages to client needs.  Second, most commercial financial institutions have a regional focus for their tower investments – we invest globally and this experience can be valuable in bringing best practice to our clients. Third, we are patient capital. Unlike private equity firms for example, IFC does not come under pressure to exit its equity investments by a certain date.