Following last year's high profile bankruptcies of two satellite phone systems ? Iridium LLC and ICO Global Communications ? syndicating a $500 million satellite mobile phone financing would be considered a challenge by any bank. But throw into the mix a failed satellite launch (a sea-launched Russian-built Zenit 3SL rocket carrying ICO Global Corp's satellite costing $100 million) during the syndication process and you have some idea of the task that faced the arrangers of Abu Dhabi-based Thuraya Satellite Company's recent $520 million financing package. But the deal has now been syndicated and the eight-strong bank group is due to be released shortly.

The Thuraya financing involved two facilities: a $420 million full recourse loan together with a $100 million Islamic financing facility. The original package had been targeted for a total of $600 million but was reduced to $520 million. The loans run for six years with drawdown staggered over the first two years followed by eight semi-annual repayments thereafter. The $420 million portion was lead managed by ANZ Investment Bank and Societe Generale (SG) together with Union National Bank (UNB). The Islamic portion was provided by Abu Dhabi Islamic Bank.

The transaction incorporates an innovative guarantee release structure, whereby the initial full guarantee of the shareholders can be gradually dismantled if and when the borrower meets certain performance requirements. At the outset, funds are priced at 120bp over Libor. This margin will rise to 230bp over Libor if the guarantees fall away or ratchet down to 120bp on the basis of a debt/EBITDA margin grid.

Following Iridium and ICO Global Communications' bankruptcies, the reception for satellite transactions in the market has been icy. Motorola-backed Iridium, which produced a global mobile telephone system with headsets costing $3,000 each, declared bankruptcy in August 1999 having vastly overestimated the market for satellite telephones. ICO also went bankrupt in 1999 without having even launched a satellite. It was with this backdrop that ANZ, which was been mandated by Thuraya in July 1999, set about selling the deal.

?This was not a blowout syndication,? says Roscow Lucas, head of syndication at ANZ International in London, in something of an understatement. ?It was difficult to do but all the underwriters met their targets.? Lucas, together with ANZ's director of the global media and telecoms group, Peter Pontidas, explains how the deal got done. ?We did it with our eyes open,? he says. ?There were concerns in the industry and we recognised the issues that people had with these names [Iridium and ICO]. We used this to benchmark the deal.?

The most important thing the arrangers had to do was emphasise the difference between Thuraya and its predecessors. The most fundamental difference was the satellite itself. The Thuraya-1 satellite has a 12-year lifespan and is positioned in geo-synchronous orbit 36,000km above the earth at 44 degrees east longitude and inclined at 6.3 degrees. It has a footprint of 99 countries across Europe, north and central Africa, the Middle East, central Asia and the Indian subcontinent. It offers voice, fax and data telephony together with messaging and global positioning (GPS) to within 10m accuracy.

This is in marked contrast to the Iridium project, which involved 88 different orbiting satellites, many of which may now be allowed to re-enter the earth's atmosphere. ?Thuraya is technologically much simpler than Iridium,? says Lucas. ?there is a much lower projected rate of dropped calls. It is a lower cost and more reliable system.? The satellite was eventually sea launched ? after a couple of delays ? on October 21.

Pontidas points to the pedigree of Thuraya's shareholders as another reason the deal got sold. Thuraya has 18 shareholders ? all of which (with the exception of Hughes Space and Communications and Deutsche Telpost (DETECON)) come from the Middle East. Most of these regional shareholders are majority sovereign owned by their respective states, and thus form a formidable group prepared to fully guarantee the transaction (see box).

These sponsors have collectively provided $500 million in equity to the project, which Pontidas sees as another strong selling point for the deal. ?There is a lot of money going in upfront,? he says. ?And these people are experts in their field and in the region, and they therefore must have believed that Thuraya know what they are doing.?

?The deal structure means that the guarantees mitigate the market and technical risk,? Pontidas continues. Even in a good market, there is no way that the shareholders could have got away without taking the start-up technical risks, and in the post-Iridium market this was essential. But the structure incorporates various windows during which tests can be done which, if met, mean that the guarantees fall away. These tests include not only technical tests, but meeting a minimum number of subscribers at certain points and meeting certain covenant tests such as debt to cash flow ratios etc. If these tests are not met within their appropriate window the guarantees stay in place and the margin alters accordingly.

But even with this robust guarantee structure in place, the deal still took over seven months to syndicate ? during which time the process was not helped by the high-profile failure of the sea launch of another satellite. ?We were never looking to close within a certain period of time as there was so much education [of potential investors] to do,? declares Lucas. Syndication was kicked off with a soft launch late last year, but, partially due to Y2K concerns, it became readily apparent that the full launch would take some time. But the arrangers felt confident enough to launch the sub-underwriting phase, which was done in two stages: a regional sell-down and an international sell-down.

Not surprisingly, the deal received good interest from the region and was quickly sold down to Arab Banking Corp and National Bank of Abu Dhabi. The international phase was, however, tougher, with what Lucas describes as ?healthy scepticism? from the market. It was, however, eventually syndicated down to Credit Lyonnais and Standard Chartered Bank. Full syndication is now complete, but the bank group has yet to be released. There are eight members, not all of which are Middle Eastern.

But it is a sign of the resistance to satellite lending that the transaction had to be cut in size. Pontidas explains that this downscale did not really affect the project due to a contingency facility already built in to the financing. ?There was initial concern over whether Thuraya could sell the handsets and a contingency had been put in place against that,? he explains. ?But the take-up was good, so this contingency was used to make up the shortfall in the financing.? The Islamic component was included at the request of Thuraya and was structured by the co-arrangers. It involves a leasing component whereby the Islamic banks own the ground station assets and lease them to Thuraya over the lifetime of the deal.

Given market attitudes to the sector, getting this deal syndicated was a real achievement. Lucas claims that it was recommended by far more lenders than actually ended up joining and admits that ?It was hard work to get a result.? The asset was unusual ? most satellite financings involve broadcasting satellites and involve taking a view on transponder leases rather than on a mobile satellite network itself. But it marks several firsts: it is the first major telecoms financing for the region, the first telecoms transaction that combines conventional and Islamic facilities and the first such project whose sponsors are overwhelmingly regional. But the fact that the deal is full recourse to the sponsors means that it is a good, relatively low-risk opportunity for banks to raise their profile in the region ? and they may have gone in for that reason alone. Given the number of banks that the arrangers approached (around 50) the final syndicate will be watched with interest.

Thuraya ordered three satellites from manufacturer Hughes: the second is a ground standby for Thuraya-1 and the third is to provide additional payload for the network as and when required. Thuraya-1 can provide services to 1.8 billion subscribers and was the heaviest commercial payload in history. Lucas and Pontidas put the final success of this syndication down to its professional structuring (involving global co-ordinators, regional co-ordinators and then a general syndication) and a lot of hard work.