Digitel
Americas Telecoms Deal of the Year 2002
Digitel
There can be few worse prospects for a sponsor than pitching a deal into the bank market at the start of one of the emerging markets' most severe political and financial meltdowns. The Digitel deal not only sold down to banks, but managed to include a number of innovative support mechanisms that give borrowers added comfort in a difficult environment. The deal also marks Telecom Italia Mobile's first project financing, and the first use of SACE cover for equity investments.
Digitel is the third largest mobile operator in Venezuela, and the largest GSM operator in the country. Its coverage area includes the centre of the country, as well as the capital and commercial centre, Caracas. It is a 70%-owned subsidiary of Telecom Italia Mobile (TIM), which has previously preferred to use balance sheet funds to support its Latin ambitions. No other shareholder has more than a 10% stake.
It first began looking at a deal in March 2001, and had signed a mandate letter with Citigroup and JP Morgan in May 2001 to look at closing a $500 million deal before the end of the year. This deal was to feature a $75 million local currency element, a $225 million five-year bank deal, and a $200 million ECA-backed vendor tranche.
The first obstacle to this plan was the increasing inability of the equipment suppliers to extend credit to Digitel, a factor partly of the vendors' distressed balance sheets rather than trouble with the Digitel credit. Siemens is the leading supplier to Digitel of GSM infrastructure, and one of the healthier vendors. But Venezuelan risk was probably the paramount concern ? even with a wrap from ECAs, as was considered, the demands from vendors included a high level of sponsor support, and wide pricing.
However the deal, which as already slated to feature strong sponsor support, did not ultimately feature vendor finance. Instead TIM decided to provide support itself, in the form of a subordinated sponsor tranche. This $230 million element ranks behind the banks in priority, and has a 7-year tenor. But TIM has extended funds far in excess of this figure, and has been paid off with this debt offering.
More significantly, the tranche is covered by political risk insurance from Italian export credit agency SACE. This is the first time that SACE has offered cover under its equity programme, since the subdebt is considered as quasi-equity. The offer marks a shift in SACE's priorities, and sets it up as a more aggressive supporter of Italian corporates abroad. It, along with Finnvera and other ECAs, held exploratory discussions with TIM about covering vendor debt.
Equally impressively, the bank debt featured two enhancement mechanisms from TIM, above and beyond the reworked subdebt cushion. First, it offered a six-month debt service guarantee, so that when debt service is set to start in March 2004, it will be September of that year before this will be exhausted.
A second offered contingent equity support that would be triggered if its earnings before interest, taxes, depreciation and amortization (Ebitda) fell below certain levels outlined in the company's business plan. Digitel's business plan is a detailed, if slightly old document, that has had to be revised in the light of the current situation in Venezuela.
The bank tranche, which ended up as a $250 million, 5-year, loan, attracted interest from 11 participant banks and featured private political risk insurance. The identities of the providers have been kept secret by JP Morgan, which co-ordinated the placement. The deal is priced according to the level of support provided by TIM, and factors in a spread above this level of sponsor risk. Margins start at 250bp over Libor, but could go as high as 450bp. Participants were ABN Amro, Banco Bilbao Vizcaya Argentaria, Barclays, Commercebank, Inarco International Bank (a Citibank correspondent institution), IntesaBCI, SG and WestLB.
The final element of the deal is a local tranche of $35 million, priced fairly wide of the international tranche to reflect the Venezuelan base rate for Bolivares, as well as the expectations of Venezuelan institutions. Citibank, the telecoms lender that usually has a presence in a given emerging market, was the administrative agent for this piece. It was syndicated down to Banco Mercantil ? Banco Universal and Banco Provincial ? Banco Universal, as well as Citi's Venezuelan branch. According to Mayra Leon, Digitel's CFO, the local tranche provided a useful hedge for currency and convertibility risk for the company.
Indeed, it is this last risk, much more than the threat of expropriation, that concerns lenders. While the continuing conflict between President Chavez has escalated in recent months, the earlier coup came just as the lenders were attempting to complete the original deal. Telecoms networks have very rarely, if ever, been the focus for nationalisation, and sabotage is difficult to meaningfully inflict upon a dispersed wireless network. Nevertheless, economic insecurity and the general strike are likely to impact upon subscriber numbers.
So far the Digitel deal is holding up fairly well and its network is 80% complete. Its subscriber numbers stand at 950,000, and while it may not achieve its target of 1.5 million users by the end of the year, it is still poised for growth. At present about 90% of its revenues are from prepaid users, and while these tend to be disproportionately affected by a downturn, they do not lead to credit problems on the scale that contract users do.
Digitel is not entirely clear of the macroeconomic and political problems that affect Venezuela, but it has created a firm template by which sponsors can lay off a degree of sovereign risk to the market, but still get deals done. It is one, for instance, that America Movil, Telmex' well-capitalised mobile arm, might consider for its investments in the region.
Corporacion Digitel
Status: closed September 2002
Size: $515 million
Location: Venezuela
Description: GSM mobile network covering central region, and 85% of the country's economic base
Sponsors: Telecom Italia Mobile (70%) and smaller investors
Debt: $250 million, 5-year bank debt, covered by private PRI, $35 million 5-year domestic currency debt, $230 million subordinated loan from sponsor, covered by SACE
Arrangers: Citigroup, JP Morgan
Margin: 250-450bp over libor, according to performance
Lawyers to the lenders: Milbank Tweed Hadley & McCloy
Lawyers to the sponsor: O'Melveny & Myers
Digitel
There can be few worse prospects for a sponsor than pitching a deal into the bank market at the start of one of the emerging markets' most severe political and financial meltdowns. The Digitel deal not only sold down to banks, but managed to include a number of innovative support mechanisms that give borrowers added comfort in a difficult environment. The deal also marks Telecom Italia Mobile's first project financing, and the first use of SACE cover for equity investments.
Digitel is the third largest mobile operator in Venezuela, and the largest GSM operator in the country. Its coverage area includes the centre of the country, as well as the capital and commercial centre, Caracas. It is a 70%-owned subsidiary of Telecom Italia Mobile (TIM), which has previously preferred to use balance sheet funds to support its Latin ambitions. No other shareholder has more than a 10% stake.
It first began looking at a deal in March 2001, and had signed a mandate letter with Citigroup and JP Morgan in May 2001 to look at closing a $500 million deal before the end of the year. This deal was to feature a $75 million local currency element, a $225 million five-year bank deal, and a $200 million ECA-backed vendor tranche.
The first obstacle to this plan was the increasing inability of the equipment suppliers to extend credit to Digitel, a factor partly of the vendors' distressed balance sheets rather than trouble with the Digitel credit. Siemens is the leading supplier to Digitel of GSM infrastructure, and one of the healthier vendors. But Venezuelan risk was probably the paramount concern ? even with a wrap from ECAs, as was considered, the demands from vendors included a high level of sponsor support, and wide pricing.
However the deal, which as already slated to feature strong sponsor support, did not ultimately feature vendor finance. Instead TIM decided to provide support itself, in the form of a subordinated sponsor tranche. This $230 million element ranks behind the banks in priority, and has a 7-year tenor. But TIM has extended funds far in excess of this figure, and has been paid off with this debt offering.
More significantly, the tranche is covered by political risk insurance from Italian export credit agency SACE. This is the first time that SACE has offered cover under its equity programme, since the subdebt is considered as quasi-equity. The offer marks a shift in SACE's priorities, and sets it up as a more aggressive supporter of Italian corporates abroad. It, along with Finnvera and other ECAs, held exploratory discussions with TIM about covering vendor debt.
Equally impressively, the bank debt featured two enhancement mechanisms from TIM, above and beyond the reworked subdebt cushion. First, it offered a six-month debt service guarantee, so that when debt service is set to start in March 2004, it will be September of that year before this will be exhausted.
A second offered contingent equity support that would be triggered if its earnings before interest, taxes, depreciation and amortization (Ebitda) fell below certain levels outlined in the company's business plan. Digitel's business plan is a detailed, if slightly old document, that has had to be revised in the light of the current situation in Venezuela.
The bank tranche, which ended up as a $250 million, 5-year, loan, attracted interest from 11 participant banks and featured private political risk insurance. The identities of the providers have been kept secret by JP Morgan, which co-ordinated the placement. The deal is priced according to the level of support provided by TIM, and factors in a spread above this level of sponsor risk. Margins start at 250bp over Libor, but could go as high as 450bp. Participants were ABN Amro, Banco Bilbao Vizcaya Argentaria, Barclays, Commercebank, Inarco International Bank (a Citibank correspondent institution), IntesaBCI, SG and WestLB.
The final element of the deal is a local tranche of $35 million, priced fairly wide of the international tranche to reflect the Venezuelan base rate for Bolivares, as well as the expectations of Venezuelan institutions. Citibank, the telecoms lender that usually has a presence in a given emerging market, was the administrative agent for this piece. It was syndicated down to Banco Mercantil ? Banco Universal and Banco Provincial ? Banco Universal, as well as Citi's Venezuelan branch. According to Mayra Leon, Digitel's CFO, the local tranche provided a useful hedge for currency and convertibility risk for the company.
Indeed, it is this last risk, much more than the threat of expropriation, that concerns lenders. While the continuing conflict between President Chavez has escalated in recent months, the earlier coup came just as the lenders were attempting to complete the original deal. Telecoms networks have very rarely, if ever, been the focus for nationalisation, and sabotage is difficult to meaningfully inflict upon a dispersed wireless network. Nevertheless, economic insecurity and the general strike are likely to impact upon subscriber numbers.
So far the Digitel deal is holding up fairly well and its network is 80% complete. Its subscriber numbers stand at 950,000, and while it may not achieve its target of 1.5 million users by the end of the year, it is still poised for growth. At present about 90% of its revenues are from prepaid users, and while these tend to be disproportionately affected by a downturn, they do not lead to credit problems on the scale that contract users do.
Digitel is not entirely clear of the macroeconomic and political problems that affect Venezuela, but it has created a firm template by which sponsors can lay off a degree of sovereign risk to the market, but still get deals done. It is one, for instance, that America Movil, Telmex' well-capitalised mobile arm, might consider for its investments in the region.
Corporacion Digitel
Status: closed September 2002
Size: $515 million
Location: Venezuela
Description: GSM mobile network covering central region, and 85% of the country's economic base
Sponsors: Telecom Italia Mobile (70%) and smaller investors
Debt: $250 million, 5-year bank debt, covered by private PRI, $35 million 5-year domestic currency debt, $230 million subordinated loan from sponsor, covered by SACE
Arrangers: Citigroup, JP Morgan
Margin: 250-450bp over libor, according to performance
Lawyers to the lenders: Milbank Tweed Hadley & McCloy
Lawyers to the sponsor: O'Melveny & Myers
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