The telecoms market in the southern half of the Americas has always presented a unique set of challenges. The various economies in the region have benefited in the last few years from perceptions that they stand at a crucial intermediate stage between the low-penetration African and South Asian markets and the mature European and US markets. Strong sponsors, especially the Spanish and Portuguese incumbents, and impressive economic growth meant that opportunities for aggressive bankers and vendors were immense.

A year ago, signs were that most of the new entrants could insulate themselves from the troubles affecting European telcos. This optimism was in part the result of a belief that increased penetration would not be too susceptible to declines in personal incomes, and that benign macro-economic conditions would in any case continue. Instead, Latin operators have been caught in a vicious tailwind.

In the last 12 months a number of local operators have faced difficulties in rolling out networks as planned. The most notorious examples of these have been in Brazil, where the government attempted to offer mirror fixed-line licences to keep the former incumbents on their toes. Vesper, which picked up two of the three mirror licences, has recently restructured, having nearly buckled under the demands of regulator ANATEL

Vesper's sponsors are Qualcomm, Velocom and Bell Canada International. It was formed from the merger of two licence winners, Vesper SP and Vesper SA, and has tried to build out a network within a footprint that includes Sao Paulo, Rio de Janeiro and Belo Horizonte. ANATEL's requirement for a fast network build-out encouraged the use of wireless local loop (WLL) technology.

WLL has its advantages in a country the size of Brazil, and is far cheaper to install than fixed technology. And the concept of wireless connection received an (albeit tragic) boost as businesses in Lower Manhattan turned to wireless technology after September 11 damaged local phone networks. But European telcos have had mixed experiences with the technology, particularly Norwegian telco Enitel, one of the few ?fallen angels' to hit banks' portfolios hard so far.

The mirror fixed-line licences forced their operators to concentrate on the areas of telephony with probably the least proven revenue streams and the stiffest competition from incumbents. They benefited, however, from strong interest from equipment suppliers ? Vesper ran up $1.9 billion in vendor finance debt from Harris, Nortel, Lucent and Ericsson. Ericsson briefly held the title of largest loan provider in the continent.

But the vendors are now less engaged in pursuing market share, and much like the commercial banks are concentrating on wooing the most important, and usually the most profitable, clients. Ericsson recently sold off a second $1.5 billion pile of vendor loans and commitments, and Lucent and Nortel still face a hostile stock market environment.

Vesper, at least, has been fortunate in maintaining the confidence of Qualcomm, now by far its largest shareholder. Qualcomm's equity stake has increased from 12.6% to somewhere in the region of 88% after a $266 million equity infusion. Start-up Velocom now holds 20% (down from 49%), and Bell Canada just 2%. The restructuring, which took place in November 2001, completes a reduction in debt from $1.3 billion to just over $200 million. Qualcomm's increased interest in the operator appears to stem from its plans to integrate it into its satellite network.

Meanwhile, Brazilian incumbents have been having an easier time, and provided the only decent-sized project financing of 2001. Telemar (Tele Norte Leste Participacoes) is a product of former state-owned Telebras, and now runs the local network in northeastern Brazil. Telemar is one of the few operators capable of making a meaningful bid for the PCS mobile licence concessions, and put together a $1.425 billion financing for its PCS operations from a mixture of vendors and commercial banks.

The package draws heavily on the expertise gained on 2000's BCP refinancing, and hones the discipline required to put together a multi-sourced financing in the region. Whilst the vendors, in this case Nokia, Siemens and Alcatel, provided around $725 million, the rest of the financing came from commercial banks, led by ABN Amro. In one respect the package does mark a step back from the earlier deal ? rather than go for an umbrella political risk insurance (PRI) policy, lenders could take bespoke coverage on each commitment.

Telemar rightly gained plaudits for gaining access to build-out capital in such a fast and decisive fashion (see Project Finance, March 2002, p. 32), but it is important to note the strength of parental support and the huge cashflows available as an incumbent. Moreover, PCS technology is not envisaged as a 3G-style service, but more of a tentative movement on from the early cellular technology. Project lenders, therefore, are now concentrating on profitable relationships (Telemar is NYSE listed) and developing a more nuanced view of political risk.

Telemar, however, has had less success recently in accessing domestic debenture markets, as BCP was able to do, and this is an area where sponsors are interested in increasing their presence. 2001 saw a number of impressive issues either in other sectors in the region (Peru and Bolivia both saw debut project bond launches, whilst Brazil and Chile added to their existing stock). The telecoms sector elsewhere saw a number of local currency issues, albeit of short tenor, in countries as diverse as Kenya and the Philippines.

Some of the difficulties in getting a bond issue out have been macroeconomic ? Argentina's troubles have had a small effect on its neighbours. But the chief problem for borrowers is that bonds are little help in retiring their existing vendor debt ? the most important priority for many CFOs at present. And conversely, as Jose Luis Salazar, CFO at Telemar PCS, points out, ?very few vendors are prepared to extend their balance sheet to operators right now, at least not without ECA support?. So more vendor support is not an option.

Salazar also notes that whilst the market for Real-denominated bonds has returned in Brazil, pricing means that the capital markets route is not the most desirable one. ?I think we got the last issue out in July of last year,? he says, ?which was priced at 75bp over the CDI for five years. Now the pricing would be nearer 200bp?. There is also little likelihood of any change to the short maturities on offer in the Brazilian market.

Local currency funding, however, is not out of the question. Colombian operator Comcel considered a split Dollar/Colombian Peso-denominated debt package, for which Citigroup had been awarded a mandate. The $200 million deal was set to include a $125 million three-year term loan, split evenly between the two currencies, a $25 million three-year peso revolving credit and a $25 million three-year term loan denominated in Pesos for Comcel's 76.5% subsidiary Occel.

The debt is split between the two operators, which are effectively merged but separated by regulations and bond covenants, with the expectation that it would replace existing debt at maturity. The debt was to be guaranteed by Telecom Americas, owned jointly by America Movil and Bell Canada International. But February saw the restructuring of Telecom Americas (TA) as a pure-play Brazilian telco. Telecom Americas shifted its interests in Comcel and Occel to America Movil, which responded by injecting sufficient equity into the Colombian operation to render the financing redundant.

America Movil, which still holds a 61% stake in TA, looks like being the latest player to dominate the continent's telecoms industry. If the earliest players in the region were the European telcos, largely the Spanish and Portuguese PTTs, and the second wave saw the arrival of the Americans, Mexico looks like providing the latest saviour.

The reason is simple ? free cashflow. The Europeans lack the balance sheets to make meaningful equity contributions to their Latin operations, and American sponsors have been disappointed by the meagre returns on their cutting edge technology. The Mexican investor, which to all intents and purposes means Telmex, has money to burn. Telmex did not join in on the earlier rushes and now enjoys free cashflow in the region of $2.6 billion per year.

Much of this money was used to fund the expansion of America Movil, which operates as Telcel in Mexico. Telcel has good experience in the prepaid market (the main way to make Latin American mobile licences profitable) and has effectively seen off its domestic competition with a marketing campaign that has taken it up to 17 million of Mexico's 22 million subscribers. The number two competitor, Iusacell, controlled by Verizon Wireless, has roughly 1.7 million.

Telmex has faced stiff criticism in the past for making little effort to abandon monopolistic practices and enjoys a cosy relationship with regulators. One example of this is the current way in which long-distance incoming call revenues are shared between Telmex and its main competitor, the AT&T-controlled Alestra. Alestra brings in solid revenues from US-originated calls, which come from AT&T's long distance US operations. But current regulations say that these revenues are shared according to the ratio of outgoing long-distance call regulators. Alestra effectively hands over a large proportion of its dollar-denominated revenues.

Alestra's financial position is, not surprisingly, precarious. Despite moving into value-added and data services, it has suffered a sharp drop in call volumes and, according to a recent analysis from Moody's, a severe liquidity crunch. Alestra has about $26 million of cash in hand and no availability under a $35 million revolver. Its access to capital markets is non-existent and although AT&T and its partners Grupo Alfa and Bancomer may inject more equity, this is not a given.

Alestra's current plan involves a $70 million loan secured upon international call revenues. WestLB is arranging the loan and expects to syndicate shortly. The deal should achieve good pricing because of its secured status and dollar revenues. But it looks set to create a further claim on free cashflow.

Telmex, through America Movil, has roughly $3 billion in debt capacity free to expand its operations in Brazil and elsewhere. It could very easily lay claim on the financing required by Iusacell and other operators such as Venezuelan operator Digitel. Digitel is still looking, despite the current uncertainty in its home country, at a $500 million project financing, led by Citibank and JP Morgan.

This deal was slated to close at the end of 2001, and would feature $225 million in five-year bank money, $200 million from ECA-backed vendor finance, and $75 million in local currency. Digitel's parent, Telecom Italia Mobile, would provide guarantees that would fall away as the operator met certain performance benchmarks.

Word from the bookrunners is that the deal is still set to close soon. This action would presumably depend on the risk perceptions of ECAs and vendors, which are, understandably, in flux. President Chavez' handling of the country's devaluation and strengthening government control of state oil company PDVSA is making outside investors nervous. In the current environment, local sponsors with equity to spare will likely make much of the running.