Against a background of fallen angels in the telecoms industry, a bank group of five has successfully completed the dual-tranche ¥140 billion ($1.2 billion) refinancing of Jupiter Telecommunications Co (J-Com Broadband). The proceeds will refinance existing debt and also provide working capital to finance an expansion of the company's operations. In a difficult market, the deal achieved a number of key milestones.

It is the first and largest loan of its type in Japan, and is seen as a benchmark and a template for further similar deals. Bank of America, Mizuho, Bank of Tokyo-Mitsubishi, Citibank and Sumitomo Mitsui Banking Corporation led the financing. The facility was syndicated down to a further eight banks ? a mix of international and Japanese institutions. They are: ABN Amro Bank, Aozora Bank, The Sumitomo Trust and Banking Co, BNP Paribas, Credit Lyonnais, Diamond Lease Company Ltd, ING Bank and Norinchukin Bank.

The ¥70 million term loan has a tenor of roughly six years. The financing package also includes a seven-year, ¥70 million revolving credit facility. J-Com Broadband's shareholders are Liberty Media Corporation (36%), Microsoft Corporation (15%) and Sumitomo Corporation (36%): The remaining ¥150 billion was provided as subordinated debt by the three shareholders. The loan is thought to be priced off Libor at around the 270bp mark. The original financing closed three years ago.

J-Com Broadband has previously been financed using a guarantee from its major shareholders, Liberty Media Corporation, Microsoft Corporation and Sumitomo Corporation. This new arrangement will enable it to secure stable, long-term funds for the company's development, and relieve pressure on parental balance sheets.

As the company has an interest in about 16 franchise companies ? but does not hold all of their shares ? the complications in dealing with other shareholders made it a complex achievement. David Miles, a partner at Latham & Watkins, which advised J-Com on the transaction, says: ?The transaction represents a radical departure from the typical financing model employed in the Japanese market to date, which invariably involves a syndicate consisting solely of Japanese banks.?

J-Com is Japan's biggest broadband and cable service provider, with a strong foothold in the market. 1.42 million people subscribe to J-Com's cable TV services. In addition 349,900 subscribe to telecoms services and 504,500 subscribe to broadband internet services, all within the Hokkaido, Kanto, Kansai and Kyushu regions. As such it resembles the competitive local exchange carriers, whose borrowings were substantial in Europe in 2000.

Graham Hollis, CFO of Liberty Media International claims: ?Being a first of its kind we have started the ball rolling in a very difficult market and got the deal done successfully. You might say we have primed the pump for future deals. Would I say the deal will provide a template for other deals? I would hope not ? the market is very difficult so we would expect the market to improve and the documentation to hopefully change. We were very pleased to get the deal done in difficult circumstances.?

The sponsors began by looking at the financing on a cashflow-based basis, so that repayment is based on cashflow rather than the rigid terms of straight project finance ? the telecoms loans seen in Europe and the US. J-Com then adapted that idea to Japanese sensibilities.

Hollis adds: ?In Europe and the US, loans of this sort are well understood and standard. Whereas in Japan, that is far from the case. We toned it down ? the US and Europe are well used to these loans so you could test the market a bit more. But in Japan we wanted to be more conservative, modest and be sure with the covenants and the security package. We wanted to make sure it would be a well-received deal. And it was.

?These are not normal markets ? borrowers have to adapt. Our change in view was part of the adaptation. With any first of a kind deal, you are going to pay attention to what the markets are doing.?

Pricing, which usually would be set by competition between arrangers, was benchmarked off European cable pricing. As it is the largest company of its kind in Japan, there was no direct comparison. Hollis says it is similar to UK ? there is a satellite provider, which competes on the video side, ADSL which competes for high speed data and the incumbent phone company competing on telephony.

It was important for J-Com to get the financing completed to round out its capital structure. Peak borrowings are projected to occur within the next twelve months as the company's business plan reaches certain targets ? which is where the deal differentiates itself. Unlike many cable deals in the European market which have been seen over the last few years, Jupiter has a short-term peak borrowing point. On similar deals in Europe the peak borrowing occurs 3 ? 4 years down the line.

Hollis says: ?Because our peak borrowings are within twelve months it is much more reasonable to expect that we can execute the business plan. So we have a company that is modestly leveraged near to peak borrowings.?

Another difference in the Japanese cable market compared with the European market is in population density: there are more people per square mile than in Europe. All construction is above ground rather than underground and the cost of money in Japan is a fraction of that in Europe and US. These construction factors mean that it costs less per customer to build a network.

The banks involved in the deal are understood to be relationship banks with any one of the three J-Com shareholders.

J-Com Broadband

Status: Closed February 2003

Size: ¥290 billion ($1.2 billion)

Location: Japan

Sponsors: Sumitomo Corporation, Liberty Media Corporation and Microsoft Corporation.

Debt: ¥140 billion

Lead arrangers: Bank of America, Bank of Tokyo Mitsubishi, Citibank, Mizuho Corporate Bank and Sumitomo Mitsui Banking Corporation syndicated down to a further eight banks: ABN Amro Bank, Aozora Bank, The Sumitomo Trust and Banking Co, BNP Paribas, Credit Lyonnais, Diamond Lease Company Ltd, ING Bank and Norinchukin Bank

Tenor: Six years on the ¥70 million term loan and seven on the ¥70 million working capital

Equity: ¥150 billion

Lawyers to the sponsors: Latham & Watkins and Paul, Weiss, Rifkind, Wharton & Garrison

Lawyers to the lenders: Clifford Chance and Mori Hamada & Matsumoto (formerly Mori Sogo).