In the rapidly evolving landscape of telecom infrastructure, maintaining a steady flow of capital is crucial. With interest rates on the rise and market conditions continuing to be volatile, towercos are compelled to rethink their financing strategies. The evolving financing landscape, sourcing new capital, managing currency volatility, and investor views on diversification are crucial in this discussion.
Higher for longer
TowerXchange Meetup Americas 2024 began with a focused discussion on the significant impact of current interest rate dynamics on the tower financing landscape. Clayton Funk, Managing Director of Houlihan Lokey, acknowledged the challenges while expressing confidence in the sector's resilience. "There’s going to be some headwinds in the space. Compared to other industries we’re in a good spot. Investors and lenders are interested. As rates have gone up, people are holding off pursuing new financing hoping rates come down," highlighting a cautious yet hopeful stance among financiers. Funk's perspective underscored the telecom tower industry's relative stability amidst economic fluctuations, buoyed by sustained investor and lender interest.
Against this backdrop of cautious optimism, Ricardo Zubieta, CFO of QMC Telecom, provided insights shaped by the realities of emerging markets. Emphasising the need for localised financial strategies, Zubieta stressed "QMC is not investment grade, all revenue is in local currency. So, we prefer local currency financing. We want to get the lowest cost of funding possible," underscoring the critical importance of mitigating currency risks in volatile markets such as Brazil. His remarks highlighted the strategic imperative for telecom companies to secure financing that aligns with local economic conditions to optimise cost efficiencies.
Expanding the conversation to further financial trends, Obinna Isiadinso, Senior Investment Manager of the International Finance Corporation (IFC), broadened the discussion by noting a shift towards alternative financing sources. "ESG is a key part of our strategy, and we are seeing increased interest in sustainability-linked financing," pointing to a growing trend towards environmentally and socially responsible investments. Isiadinso's comments illustrated a larger market trend towards sustainable finance practices, reflecting global movements towards responsible investing.
New investments and capital recycling
Transitioning to strategies for sourcing new capital, Nikola Trkulja, Managing Director of Grain Management, stressed the importance of flexibility and creativity in financing approaches. "If a company is scaling, lacks cashflow then maybe you need mezzanine debt, preferred equity, dollarised, which can be more expensive," Trkulja suggested, highlighting the need for adaptive financial solutions tailored to varying growth stages and financial circumstances within the telecom sector.
Benjamin Judson, Vice President of Radius Global Infrastructure, elaborated on their evolving financing strategy amidst high-interest rates. "That’s changed at high rates. We value flexibility more today. We used to insist on matching our financing and our investment returns, but we have had to think about the next round of financing and look at things like floating rate debt," he explained, pointing to a strategic pivot towards more flexible financing instruments to navigate the current economic climate effectively. Judson's insights underscored the sector-wide adaptation towards agile financial frameworks.
Lower valuations and M&A
Clayton Funk anticipated a broader market shift from traditional private equity to long-term infrastructure investments, asserting, "Traditional PE will get priced out of the space in favour of long-term infrastructure investors." This forecast signalled a potential realignment in investment strategies, emphasising stability and enduring returns over short-term gains.
Lower valuations in the telecom infrastructure market have posed both challenges and opportunities for mergers and acquisitions. Clayton Funk noted the nuanced impact of these valuations, observing, "Lower valuations are causing some deals not to get done. There’s a gap. Some valuations expectations stop deals," highlighting the need for realistic valuation expectations in facilitating successful M&A transactions amidst fluctuating market conditions.
Regional disparities
Obinna Isiadinso highlighted regional disparities in tower valuations, identifying opportunities for strategic investments across varied markets. "Towercos in USA are valued at 20x. In Africa it's 7-10x. Europe is 15x. Asia 10-20x. It creates a window of opportunity for opportunistic investors," he explained, underscoring the potential for value arbitrage across different regions.
Nikola Trkulja emphasised the importance of investor conviction in driving successful M&A activities, noting, "Most processes are shallow. There are only a few buyers with conviction that believe in the team, assets and market and are willing to pursue it," highlighting the critical role of confidence and strategic alignment in closing deals.
Mitigating currency volatility
Managing currency volatility emerged as a critical concern for telecom infrastructure firms operating across diverse global markets. Ricardo Zubieta stressed the significance of local currency financing and comprehensive risk management strategies. "Not just looking at FX, but also looking at volatility in high inflation countries, there are big swings, " he detailed, outlining the multi-faceted approach necessary to effectively mitigate financial risks.
Benjamin Judson expanded on the challenges of aligning debt with local currencies in varying regional financial environments. "We want to match local-currency debt where we can. It’s more difficult to do local government debt in LATAM than in Europe," he observed, highlighting the complexities and benefits of localising financial structures to hedge against exchange rate fluctuations.
Diversification strategies and future prospects
Reflecting on market trends driving diversification in telecom infrastructure, Obinna Isiadinso from IFC, underscored the strategic value of such expansions. "Diversifying into datacentres is seen as okay. Market structure changes or moving infrastructure closer to customers could create value," highlighting the strategic alignment necessary for successful diversification efforts.
This alignment ensures not only operational efficiency but also enhanced customer satisfaction. Consequently, telecom companies are better positioned to capitalise on emerging opportunities. Nikola Trkulja emphasised the need for rigorous analysis and sustainable growth in pursuing diversification strategies. "It needs to consistently generate that growth without sucking up too much capex. In some instances, it's possible, or necessary," he explained, advocating for a measured approach to diversification aligned with long-term business objectives.
The telecom sector's strategic diversification into areas such as datacentres and infrastructure optimisation are proving essential for staying competitive in a rapidly evolving market. By aligning these expansions with market demands and technological advancements, telecom companies are not only enhancing operational efficiency but also significantly boosting customer satisfaction. This proactive approach positions them to capitalise on new opportunities and drive future growth.
Conclusion
Clayton Funk from Houlihan Lokey, concluded by affirming the sector's pivotal role in supporting digital infrastructure. "The tailwinds of digital infrastructure are significant. The investor confidence in the space. It’s not just consumers doing this, but everyone else going wireless," he remarked, underscoring the telecom sector's integral contribution to the broader digital economy.
TowerXchange Meetup Americas provided a comprehensive overview of the evolving telecom infrastructure financing landscape amidst challenging economic conditions. Insights from industry leaders highlighted the importance of flexibility, strategic risk management, and sustainable investment practices in navigating uncertainties such as elevated interest rates and currency volatility. This dynamic discussion underscored opportunities for strategic investments and growth in the telecom infrastructure sector, reinforcing its resilience and pivotal role in the global digital transformation.
