The recent turmoil in telecoms markets has gone from the bane of alternative carriers' funding searches, to a dampener on the credit ratings of European incumbent telcos to a massive profits headache for the equipment suppliers. In Latin America, more particularly Brazil, the situation is no less disturbed but the dynamics are slightly different. The Telemar financing ? $1.4 billion for a former incumbent ? is a feat unlikely to be matched this year by its potential rivals.

1999 and 2000 was an extended fundraising process for mirror licence holders ? those entities set up by Brazilian regulator Anatel to provide competition to the regional progeny of state monopoly Telebras. Vendor finance was a key component of the capital influx to the country's telecoms sector, with the result that Ericsson emerged at the end of 1999 as one of the region's largest project finance arrangers. Lucent Technologies put up $780 million for the roll-out of its alternative fixed-line network.

At the time, much of the talk centred on the next big step, the awards of the PCS wireless licences, a rough equivalent of 2G GSM technology in Europe. Telemar (full name Tele Norte Leste Participacoes S.A.) is the fixed line operator across a broad swathe of Brazil's Northeast, and is quoted on the New York Stock Exchange. In troubled times, it has found itself at the front (and, this year, at least) at the back of the PCS financing queue.

The difficulties facing a telecoms operator and its lenders are threefold. Firstly there is the wish of many commercial lenders to scale back the levels of telecoms exposure on their books ? Bank of America and WestLB being often suggested as newly sceptical. Second, and probably most important, is the developing economic crisis in the region, spearheaded by Argentina's furious attempts to stay on top of its $130 billion debt mountain. Brazil's currency is already taking a beating as a proxy for the presently untouchable Argentine peso.

The final difficulty is the state of the finances at the major equipment suppliers. Ericsson has begun a retreat from supplying handsets, Nortel announced a large loss and Lucent has spent most of 2001 denying reports that it is bankrupt. Telemar has concluded agreements with firms less exposed to the current troubles ? Nokia, Siemens and Alcatel. All three have been growing their expertise in handset technology (although Nokia has long been a market leader) and have lower exposure levels in network equipment supply.

Moreover, bankers close to the deal prefer to highlight the key factor in getting the deal done, and the reason why the vendors have remained in this market ? cashflow. Telemar has a footprint stretching down as far as Rio de Janiero and a large and growing customer base. Its service area covers 64% of Brazil and some 93 million people. It finds itself in the same position as many European incumbents of the early nineties who accessed relatively low-priced off balance-sheet capital to finance their ventures into wireless.

The financing consists of $1.425 billion in both covered and uncovered vendor financing. $725 million comes direct from the vendors ? Siemens ($160 million), Nokia ($425 million) and Alcatel ($140 million) ? whilst $700 million comes through a syndicate of commercial banks. All participants were offered political risk insurance on their own commitments rather than through a facility-wide umbrella policy. The view amongst political risk providers (still the only market players filling their books with telecoms exposure) is that telephone networks are rarely prime targets for expropriation, although transfer and convertibility problems still have potential.

The second part of the financing is an untied credit from the Japan Bank for International Co-operation (JBIC) of $300 million. The word from JBIC is that the loan is more developmental in nature than in support of Japanese exports, and it makes reference to the Kyushu accords on ?bridging the digital divide? in the developing world. Mobile telephone networks can be favoured targets for this form of assistance since in several regions (Bangladesh is believed to the first) wireless penetration has exceeded fixed line penetration. The loan has a tenor of 10 years and yields 1.8% in Yen, pretty close to OECD guidelines.

ABN Amro and Citibank took the roles of lead arrangers on the deal ? a slightly smaller version of the lead group on last year's BCP Refinancing. The debate over who the prime movers were amongst the arranging group for the landmark 2000, $1.7 billion BCP deal continues. Nevertheless both banks will have brought a considerable degree of experience to the negotiations. They will have probably been a little more comfortable this time round with the Telemar credit, which is where the financing is secured, rather than the TNL PCS subsidiary. The arranger group for Telemar also includes Bank Boston, Banco Bilbao Vizcaya Argentaria, ING, JP Morgan Chase, SG and Wachovia Securities.

The deal is structured so that the vendors can sell on their portions at a later date, whilst at the same time turning eight-year money into a form that can be digested in the bank market. The $725 million has a tenor of 2+3 years, and is split into a number of tranches. Tranches A1 and A2 are priced at 325bp for a 2.5-year tenor and 350bp for three years respectively, and do not feature PRI. The next three are of 3.5 years (300bp), four years (325bp) and 4.5 years (350bp) with a 175bp sweetener of PRI is declined. The final tranche is a five-year bullet tranche priced at 75bp over the sovereign.

The main concern will be the continued ability of Telemar to service dollar-denominated debt and to abide by the licence agreement concluded with Anatel. Telemar says that it will reach targets set for 2003 by the end of the year for its fixed line service, and it must also spend at least R3.1 billion ($1.2 billion) on the PCS license. Nevertheless it is pressing ahead with plans to obtain a $1.3 billion credit from domestic development bank BNDES by the end of the year.