Vendor Finance Saves The Day For New Latin American Telcos
By MARGARITA PALATNIK
Dow Jones Newswires
NEW YORK -- A cynical take on vendor finance for the telecommunications industry in Latin America is that
it's like car loans offered by dealerships: they either get you with the price of the car - in this case telecom
equipment - or they get you with the financing.
But things aren't quite that simple.
Take industry growth, for example. Latin America is reaching a second stage in telecom liberalization, currently
at the threshold of widespread competition brought by Competitve Local Exchange Carriers, or CLECs.
Governments in Brazil, Mexico, and Argentina, to name the largest, are granting new operator licenses which
break the monopolies or duopolies installed after privatizations in recent years.
The process brings industry expansion figures above rates for most of the world, at a moment when financing for
anything related to an emerging market has all but dried up.
The potential is particularly noticeable in cellular services: between 1999 and 2003 the number of Latin American
subscribers is expected to grow at a compound average rate of 32% to 78.9 million subscribers, according to
the "Wireless99" report from Micrologic Research. This compares with a 7.4% rate seen for the U.S. in the
same period.
So what are market-share-hungry equipment makers to do?
Well, finance the equipment sold, throw in a few million dollars more to help cover construction costs or to pay
for licenses, and why not, add some cash for working capital. What the heck, while they're at it, they can also
take an equity stake to improve the pedigree of an upstart.
"Don't forget we're talking about a bunch of sales people who need to hit sales targets," said Chris Cona, an
investment banker with Societe Generale.
Competition is fierce, with operators citing Sweden's Ericsson S.P.A. (I.ERC), U.S.-based Lucent Technologies
Inc. (LU) and Canada's Northern Telecom Ltd. (NT) as the toughest rivals in their marketing - and finance -
efforts.
"It's a war out there," said Ericsson corporate treasurer Karl-Hendrik Sundstrom.
Although all involved agree that equipment manufacturers like Ericsson, U.S.-based Qualcomm Inc. (QCOM)
Nortel have become more aggressive in their finance offerings of late, hard figures and terms are difficult to come
by.
New operators, for their part, don't have much of a choice in terms of credit alternatives. Upstarts draw their
whole business plan around vendor finance. Even more established firms, backed by rich partners, welcome the
chance to defer payments and free up cash-flow in times of economic uncertainty.
Vendors acknowledge that the finance ball is in their court, but beyond saying that terms vary widely they are
mum on specifics. Operators don't share much information either, afraid of disclosing their strategies or of helping
their competitors in their bargaining with equipment makers.
Market share is a strong driver. On that front, wireless equipment vendors have an added incentive to be
competitive on financing, as they strive to impose the standard technology. The battle pits CDMA technology, on
the U.S. side, versus TDMA and GSM in the European corner.
"Market share is definitely a factor," SG's Cona said. "And in CDMA versus GSM and TDMA the two poles
are Qualcomm and Ericsson."
Vendor finance "is a function of what you think you're selling," agrees Standard & Poor's equipment analyst
Bruce Hyman. "It's not just equipment, but footprint, relationships... they are very complicated transactions that
also take into account (the manufacturers') philosophy on risk."
Qualcomm, which holds patents for the CDMA technology, takes market-share drive so seriously, that it has
taken equity stakes in companies in Chile and Mexico, later offloading them into a specially-created subsidiary.
Finance can add up to twice the amount of equipment purchased. Telscape International (TSCP) is a case in
point. The U.S.-based company is negotiating the purchase of about $100 million in equipment for a wireline
network in Mexico, where it won a long distance concession recently.
"We're actively pursuing vendor finance for our buildout," said Telscape chief financial officer Todd Binet.
Telscape seeks funds for the whole network. "We're looking at equipment plus construction," Binet said.
Financing the "turnkey solution" could add up to 200% of the value of the equipment purchased, he added. "It
depends on the network configuration, and on what equipment you're talking about."
Telet, a cellular operator in the Brazilian state of Rio Grande do Sul controlled by Bell Canada International Inc.
(BCICF), and Canada's Telesystem International Wireless Inc. (TIWIF), has also resorted to vendor money.
Ericsson will supply Telet with equipment and services worth 170 million reals (BRR) ($1=BRR1.19.) over three
years. It will also bridge-finance the full amount of the equipment plus provide a working capital facility of up to
$49 million. And once Telet secures long-term financing from the country's development bank, the guarantor will
be no other than Ericsson.
Another Brazilian company, Telesp Celular Participacoes SA (TCP) has tapped its vendors' coffers repeatedly.
According to Flemings' analyst Ronald Aitken, NEC do Brasil financed a BRR427 million contract Telesp, with
payments due between 1998 and 2005 at rates that range from 0.7 to 2.5 percentage points over LIBOR per
year. Telesp also received financing from other providers at rates that vary from 2.5 to 6.5 points over LIBOR,
Aitken said.
Vendors acknowledge their new role.
"There is a lot of funding right now," concedes Ericsson's Sundstrom. "We've increased financing for the last five
years. It has become a more integrated part of the total solution that we provide to our customers."
The downside for equipment makers, observers say, can be increased exposure to emerging markets and
deteriorating balance sheets.
Sundstrom said that Ericsson looks at ventures like a professional bank would, assessing future revenue stream,
debt to equity ratios, interest rate coverage, etc. "We try to work on bankable terms, like professional banks," he
said.
On limits to the amount of finance offered, Sundstrom said: "That's something I continuosly talk to my board
about." But he added that although there's a ceiling to the funding offered, Ericsson isn't close to reaching it.
He added that although in Asia Ericsson may have experienced a "slow down in payments," the company hasn't
suffered losses from vendor finance to date.
S&P's Hyman thinks "companies have the right to be as aggressive as they want to be, but they have to balance
who they want exposure to." In his view, however, none of the large equipment providers have yet jeopardized
their credit ratings. "Qualcomm has a "BB-" with a stable outlook on it," Hyman said, adding that their exposure
"at this point is consistent with their rating."
At Lucent, which hasn't signed any vendor finance in Latin America in the past year, spokesman Jeff Baum said
that any deal has to make good business sense.
"We have to be certain that the companies are credit worthy, and not do a deal just to do a deal," Baum said.
"All credit requests are approved by senior management."
-By Margarita Palatnik; 201-938-2226; margarita.palatnik@cor.dowjones.com |
