International project lenders have been able to grab another rare chance for Malaysian exposure ? through a RM1 billion ($255 million) financing for Malaysia's third largest mobile operator, Digi.com. The deal follows close on the heels of Malakoff's GB3 power project. Ringgit lending constraints and the fact that most Malaysian projects are financed through the local bond market, prevent international banks securing more than a small slice of Malaysia's total project business.

The Digi deal, led on the international side by Credit Agricole Indosuez and JP Morgan Chase (joint book-runners) IntesaBci (technical bank), and SG (EKN agent), involves a RM700 million equivalent EKN supported tranche and a RM300 million clean tranche (arranged by Arab Malaysian Merchant Bank, Commerce International Merchant Bank and RHB Bank). The fundraising part pays for Digi's RM1.7 billion network expansion program aimed at increasing capacity to meet the needs of over 3 million subscribers. The remainder of the project cost will be paid for through internal cashflow.

One of the most key novelties of the deal was EKN's agreement to provide guarantees in Ringgit. ?This is the first time that EKN has provided a local currency guarantee in Malaysia,? says Mickey Mehta, head of telecoms at IntesaBCI. Mehta adds that EKN took the initiative on the deal, aware that Malaysia, like a number of other Asian markets enjoyed plenty of local banking sector liquidity and that the operator wanted naturally to match revenues with liabilities.

Market sources also say that that Ericsson was instrumental in getting export credit agency agreement to a foreign transaction by demonstrating that competing ECAs were contemplating a local currency guarantee to support their respective telecoms exporters.

The structure of the deal is complex. Handelsbanken, Bank of Nova Scotia, Nordia, Bank of East Asia, Fortis, and Natexis joined the RM700 million guaranteed tranche, but not as lenders, rather as guarantee providers. The arranging banks similarly provided standby letters of credit that eased the deal's entry into the local Malaysian bank market.

Local institutions will supply the actual funding for both the EKN guaranteed and market tranches. ?Malaysian financial companies get guarantees from minimum ?A' rated banks and in return provide fixed rate funding to Digi,? says one banker.

Almost all Malaysian Banks are already heavily exposed to the local telecoms sector, says the banker, but the chief reason for the bank guarantees is the one obligor limit imposed by the Malaysian central banks, which prevents most Malaysian institutions from increasing their exposure to Digi. The banking guarantees allow the obligor limit to be waived. ?I think most local finance houses would have been happy to lend without the guarantees, if they had been allowed to,? notes the banker.

But both the LCs and Telenor's role in the project were enough to convince the three Malaysian arrangers of the attractiveness of the deal, says another Hong Kong-based financier. The three banks decided not to syndicate but rather to hold onto their respective underwriting commitments.

The lead banks report strong interest from international institutions partly because of Telenor's increased stake in the venture. Godwin Chang at SG's export finance department in Hong Kong says Telenor increased its shareholding in Digi to 61% (the maximum allowed under Malaysian law) from 33% on September 14, last year. Telenor's acquisition of Digi stock represents the largest single foreign shareholding in an Asian telecoms operator.

Chang notes that the deal is a limited recourse project transaction, contrasting with many other Malaysian telecoms deals. ?It's been structured this way because the size of the network increase which is being financed is substantial relative to the size of Digi's existing network,? says Chang. As structured, the bank deal also offers longer tenor than the standard Malaysian corporate bond. ?Liquidity in the local bond market tends to taper off after five years,? notes a bond trader. Another source notes that the deal features no cash flow deficiency support but does include minimum ownership covenants.

Tenors for the Digi deal are between six-and-a-half and seven years. Fees are described as ?thin? by the bankers involved. Upfront fees are 65bps for $15 million and 50bps for $10 million. Tranche A of the loan (covered by EKN) carries a guarantee fee of 100bps, the clean B tranche carries a guarantee fee of 200bps down to 150bps.

The successful financial close comes at a time when Digi's market position is under threat. Anticipated market consolidation is the reason. This year, Telekom Malaysia is widely expected to buy into Technology Resource Industries (TRI)/ Celcom while there is talk of a tie-up between Maxis Communications and Time dotCom. If these plans are realized, entities twice and three times Digi's size in terms of customer base will be created.

On a brighter note, some analysts think Digi and Celcom's joint bid for a 3G license is a precursor for a full blown merger. But this move would be blocked should another market rumour turn into fact: some observers speculate that Deutsche Telekom will soon sell its 21% stake in TRI and Malaysia Telekom and TRI will merge, leaving Digi stranded without a partner.

Adding to Digi's current problems is increasing earnings pressure. Already hit by slower subscriber growth and heavy discounts for new customers, Digi's future earnings will come under added pressure because of higher tax charges and a more conservative depreciation policy. Digi's depreciation bill is forecast to rise by RM60 million a year. n