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To: Eric L who wrote (1781)	12/6/2001 1:41:49 PM
From: Eric L	Read Replies (2) \| Respond to of 9255

re: EMC on 3G Financing >> The Challenges In Financing 3G Roll-Out Devine Kofiloto EMC Cellular December 5, 2001 Before the 3G auctions the financial community, lulled by the success of GSM technology and adopting a taken-for-granted attitude towards a relatively new technology, was quite relaxed about the risks involved with 3G. On this backdrop risk issues were not seriously discussed and if they were, not given much focus. At the 3G Financing Conference held in London from the 22-23 November 2001, Ken Goldsbrough of Barclays Capital in his opening remark aptly described the telecoms sector as now having reached a crossroads. Since the downturn telecoms stocks and shares financiers have become considerably more wary and as a result the appetite for telecom debts has diminished. Spreads have drastically gone up from 80 basis points for 2G businesses a year ago to 200 basis points for 3G businesses, reflecting the risk and uncertainty surrounding a business model built around wireless data growth which has not yet been manifested. The bursting of the internet bubble had the knock-on effect of triggering a closer look at the much hyped potential 3G revenue streams, with the resulting effect that, the limited visibility of demand of service is making capital planning very difficult to justify. Lenders' Market Though there are still pools of funds available they are quite limited. There are now a reduced number of investors and bankers prepared to lend. Amongst this pool of lenders the trend is towards lining up a consortium of backers to spread the risk. Institutional investors are now beginning to enter the market and their role is expected to increase rapidly. However the sector cannot be solely financed by institutional investors. Most network operators have reached the limits of their debt capacity, and some are beginning to consider opting out as the best economic option. Broadband Mobile in Norway has been the first casualty , while in Spain Xfera is adopting a hold strategy following the Spanish government's refusal to grant it additional 2G spectrum. CAPEX Sharing The consequence of the credit crunch can be seen all around. In their bid to cut their funding exposure to 3G, licence holders are forming partnerships and entering agreements to share infrastructure roll-out costs. Though this option will help in reducing CAPEX from between 20%-40% during initial network roll-out, it is not without its inherent future problems . CAPEX Sharing Agreements Entered Into In Europe Operator Country Status tele.ring/3G mobile Austria Agreement reached Viag/T-Mobile Germany Agreement reached E-Plus/Group 3G* Germany Agreement reached Telfort/KPN Mobile Netherlands Currently in talks BT Cellnet/One 2 One UK Agreement reached Europolitan/Hi3G** Sweden Agreement reached Telia/Tele2 Sweden Agreement reached Mobilcom may join this group Orange Sverige may join this group Source: Barclays Capital, EMC* Project Financing Having reached the limits of their debt capacity most operators are now increasingly opting to develop the projects off their balance sheets in order to maintain their ratings level. The financial markets are more favourable towards operators with an existing 2G operation as they are more willing to use the cashflow from the 2G business as a bases for financing 3G roll-out, given the high level of uncertainty associated with 3G revenue streams. This trend is evidenced by Amena's EUR 2.4 billion facility, WINDS's EUR 5.5 billion facility and mmO2's GBP 3.5 billion facility. Vendor financing is also increasingly constituting a component of these loan facilities, but now the vendors who have not been left unaffected by the current economic downturn, are also becoming cautious, and with the equity and debt markets increasingly asking for clarification of their vendor financing structures, carrying such money on their balance sheet is something they would prefer not to do . One solution being adopted by some vendors to limit their exposure, is the creation of Special Purpose Vehicles (SPVs) to get such financial commitments off-balance sheet. These developments have put the new 3G 'greenfield' operators at a disadvantage, as they have nothing to bring to the table. In Italy Hutchison Whampoa had to provide some parental support in having to guarantee EUR 2.2 billion of H3G's EUR 3.2 billion Italian facility. This was very much in contrast to the situation only a year ago when they easily got financing for their UK operations; reflecting the change in the market. In the case of Mobilcom in Germany an earlier facility of EUR 5.7 billion will soon be due for refinancing in August 2002 and without the support of its parent, given it current financial situation, it may struggle to meet its commitments. Speaker Tom Brown from Deutsche Bank, put it bluntly by saying 'any new debt unsupported by current cashflow or an investment grade issuer will likely only be palatable to a bank if it can see the net present value of commissions receivable exceeding any possible loan loss'. Regulatory Transparency The pressure is not only on the operators alone, regulators are also coming under pressure and some are having to go back to the drawing board to address the licence terms in the hope of giving operators some leeway. The 'clarification' of licence terms has in some cases resulted in the relaxation of network sharing concepts with particular reference to the German and French regulators. The French government has even gone further by agreeing to cut the cost of the 3G licences from EUR 4.24 billion to EUR 0.619 billion plus a share of future revenue. The regulatory inconsistencies in regards to network sharing within the various European markets was pointed out as another pivotal issue high on the agenda of financiers in their evaluation of risks. Klaus-Dieter Scheurle, Senior Regulatory Specialist and a former head of German regulator RegTP, expressed in his presentation that we are likely to see more favourable roll-out requirements in European countries other than France and Germany have announced. The general consensus though was that, though we are going to see some regulatory relaxation, they are not likely to be consistent across Europe. However in addressing this issue one cannot look away from the fact that the regulators find themselves in a situation which does not allow them much room to manoeuvre, as changing the licence terms now is likely to result in a deluge of legal complaints against them by those who lost out. Looking at Germany as a case in point, the regulator was only able to relax regulations by claiming to have merely reinterpretd the regulations Consolidation Looking More Likely Ongoing funding concerns are affecting attitudes towards KPN, Moviles, MobilCom and Sonera, and with the capital markets not too keen towards funding 3G start-ups, the general consensus at the conference was that consolidations may still be on the cards. However as most regulators prohibit ownership of two 3G licences by the same company; for those who paid high initial licence fees this might be a deterrent as it would be difficult writing off such huge amounts. The cost of 3G has meant that exploiting scale has become a strategic imperative. Operators with a pan-European footprint stand to gain the most, as they will be able to spread the cost of introducing new services. So far only Vodafone and Orange have succeeded in creating a pan-European footprint, others with such ambitions such as TIM, Telefonica and T-Mobile have readjusted their sights, choosing not to further increase their debt capacity. Conclusion The conference concluded on the note that, in spite of the doom and gloom, deals are still being done. The deals are now more complex in their structure to mitigate risks. The one question that was left unanswered was whether the amounts paid for the 3G licences in the UK and Germany will ever be justified. << - Eric -