eMobile: Next gen banking

For the first time, the usually conservative Japanese banking community has taken on 3G market risk. And while the eMobile deal is unlikely to open up the Japanese market to a flood of similar telecoms deals (if any), its repercussions are likely to be felt across other sectors in Japan, where project financings with a meaningful dose of market risk have yet to take hold.

Banks warmed to the deal largely on the back of the strength of the eMobile management team and the thoroughness of its business plan. eMobile's founding managers have backgrounds at IBM and electronics manufacturing firm MNC, and the company's parent, eAccess, is a major Japanese broadband player with a proven track record and 80 million customers.

In all, the borrower combined two rounds of equity financing with a ¥220 billion ($1.98 billion) non-recourse financing to satisfy the debt requirements of eMobile's business plan – predominantly to fund the construction and rollout of its 3G network. The combined capital raising exceeded the company's original expectations: eMobile secured ¥360 billion for a greenfield project that is likely to cost in the region of ¥350 billion.

On the equity financing side, eMobile experienced overwhelming demand from domestic and overseas investors attracted to the deregulated Japanese 3G market, and the issuer's potential. The first round of equity investment closed with the issuance of ¥28 billion of shares. The subsequent round of equity investment closed 31 May 2006 bringing in a further ¥27.3 billion. Following both transactions, the total paid in capital (capital shares and capital reserve) of eMobile is ¥143.2 billion and eAccess' ownership in eMobile is reduced to 46.2%.

Goldman Sachs is the largest foreign investor, holding almost a quarter of the share capital. Other shareholders include Temasek Holdings, the investment company linked to the Government of Singapore, which was the lead investor in the second round of equity financing. Temasek invested ¥12 billion in eMobile for an equity stake of around 7%, making it the third largest shareholder after eAccess and Goldman Sachs.

On the debt financing side, eMobile has secured a ¥220 billion non-recourse facility, with 10 major domestic and international banks coming in at mandated lead arranger level. The majority of banks took a ¥22 billion commitment: Aozora Bank; Bank of Tokyo Mitsubishi; Calyon; ING; Mitsubishi Trust & Banking; RBS and SMBC. With JP Morgan coming in with ¥25.5 billion, Mizuho Management Advisory Company ¥22.5 billion and Goldman Sachs ¥15 billion. The coordinating agents were Mizuho, JP Morgan, BTM and SMBC.

The debt splits into three tranches: a ¥20 billion revolving credit facility; a ¥110 billion seven-year bullet facility; and a ¥90 billion six-year constantly-amortized term loan. Because of its equity capital and current cash flow the first debt disbursement did not occur until this year – the debt was put in place to provide a watertight business plan to potential equity investors.

As is typical on most telecoms financing, the margin on the debt ratchets according to the debt/Ebitda ratio. Over 3.5x debt/ebitda the loan pays 225bp over Tibor; over 3x, 200bp; over 2.5x, 175bp; and over 2x 150bp. The loan is priced over Tibor rather than Libor, to make local and regional banks more comfortable coming in at general syndication: bookrunners courted local investment and savings banks in Japan, China and Taiwan. In total, the lead arrangers sold down about ¥80 billion of debt. The commitment fee is 50bp, the reservation fee 25bp and sub-underwriters get an upfront fee of just over 100bp.

Effectively, the medium-term project financing is a bridging loan to fund eMobile's business plan so that investors can look for an exit – most likely an IPO. eMobile is scheduled to begin its data service by March 2007, its voice service by September 2008 and achieve breakeven during 2010. It is after breakeven that an IPO is most likely, although a refinancing is also possible.

The financial engineering even allows for eMobile's emergence as a fully fledged corporate, since the margin paid on the debt will eventually be set according to the company's rating – when it gets a rating – rather than its debt/Ebitda ratio. This is only significant if eMobile outperforms its projections, because at the scheduled breakeven point 2010 (and with three years left on the loan) its balance sheet would still be some distance from garnering a useful rating.

The deal is both the largest and first project financing for Japanese greenfield telecom operations, and the banks take on full market risk without recourse to eAccess. But despite the deal's success it is unlikely to be repeated in the Japanese telecoms sector. The two other recipients of the three 3G licenses awarded by the government, Softbank and IP Mobile, are unlikely to tap project finance for their 3G rollout. So despite eMobile's success, and while telecoms dealflow may be patchy, the financing should signal a sea change for increased market risk acceptance in the Japanese banking community.

eMobile
Status: Closed end of March 2006, round one equity disbursed 25 April, debt 2007
Description: ¥350 billion equity and non-recourse financing for eMobile's 3G rollout and business plan
Sponsor: eMobile (shareholding after new issuance: eAccess Ltd. 46.2%, Goldman Sachs Group 24.9%, Temasek 7.0%, Tokyo Broadcasting System 6.6%, Woodperker Group 3.5%, New World TMT Limited 3.5%, Mitsui & Co 2.9%, Others 5.4%)
Mandated lead arrangers: ING; Aozora Bank; Calyon; JPMorgan; Mizuho; SMBC; BTMU; Mitsubishi; RBS; Goldman Sachs
Sponsor legal counsel: Anderson Mori & Tomotsune
Lender counsel: Nishimura & Partners