Japan's largest project financing for a greenfield telecom operation has successfully closed.

The usually conservative Japanese banking community has warmed to the eMobile management team and the strength of its business plan to take on full 3G market risk. The project company, eMobile, is combining two rounds of equity financing with a ¥220 billion ($1.98 billion) non-recourse financing to fund the construction of its 3G network.

On the equity financing side, eMobile has experienced overwhelming demand from potential domestic and overseas investors attracted by the deregulated Japanese 3G market. eMobile, a subsidiary of eAccess Ltd – a major Japanese broadband player with 80 million customers, has completed the first round of equity investment through the issuance of ¥28 billion-worth of shares. Following the transaction, the total capital shares and capital reserve of eMobile has reached ¥115.93 billion, with eAccess' ownership diluted to 51.4%. Goldman Sachs is the largest foreign investor holding almost a quarter of the share capital (see info box).

eMobile will complete an additional ¥14 billion facility scheduled to close in June, with eAccess' ownership anticipated to be around 45-51%.

On the debt financing side, eMobile has secured a commitment line of ¥220 billion non-recourse debt 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 is due in 2007 – the debt was put in place to provide a watertight business plan to potential equity investors.

Typical on most telecoms financing, the interest on the debt ratchets 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. A sub-underwriting phase should finish by the end of May. A general syndication is then planned with the bookrunners looking to court local investment and savings banks in Japan, China and Taiwan. In total, the lead arrangers are looking to sell 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.

Banks on the deal were very impressed with eMobile's management team: "eMobile is seen as a very bright rising start-up in Japan," says one banker familiar with the deal. "It is rare to see a business plan so well written, with such a high level of financial structuring and projection."

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

The financial engineering reflects eMobile's probable emergence into a fully fledged corporate, with margin paid on the debt ratcheting according to the company's rating – when it gets a rating – rather than debt/ebitda ratio. This is only significant if eMobile outperforms its projections, because at the scheduled breakeven point 2010 (and three years left on the loan) its balance sheet would still be some distance from warranting a rating.

The deal is the largest and probably first project financing for Japanese greenfield telecom operations, with the banks taking on full market risk without recourse to the parent company eAccess.

"There is a lot of significance with this deal," says one participating banker. "We were able to generate a syndicate to support a greenfield project in a once very regulated industry. It is normally very difficult to bank such projects in the conservative Japanese banking community, but Japanese banks were able to work alongside international banks to successfully close this deal. It is financially and strategically important for both the financial and telecommunications markets in Japan."

Despite the deal's success it is unclear if it will be repeated any time soon. The two other recipients of the three 3G licenses awarded by the government last year, Softbank and IP Mobile, have not intimated to the market their business plans or how they intend to obtain financing for the 3G rollout. Softbank's balance sheet probably cannot support a cash-funded rollout after its ¥1.7 trillion acquisition of Vodafone, and will probably go the corporate route once the dust settles. So despite eMobile's success, as one market participant says, "it's not very easy to get further financing for next generation telecom operations."

While telecoms dealflow may be patchy, perhaps eMobile signals a sea change for the acceptance of greater project finance risks by the Japanese banking community.

eMobile
Status: Closed end of March, round one equity disperses 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 (51.4%); Goldman Sachs (24.9%); Tokyo Broadcasting System (7.8%); Mitsui (3.5%); others (12.4%))
Mandated lead arrangers: ING; Aozora Bank; Calyon; JPMorgan; Mizuho; SMBC; BTM; Mitsubishi; RBS; Goldman Sachs
Sponsor legal counsel: Anderson Mori & Tomotsune
Lender counsel: Nishimura & Partners