After a legal battle that ran for almost eight months, limited recourse financing for the Sfr700 million ($450 million) mobile and fixed-line networks for the Swiss telecom company diAx closed at the beginning of November this year.

The deal has had a rough ride. Problems started in September 1998 when Switzerland's diAx was taken to court by local competitor Sunrise after the Swiss government had awarded diAx and Orange Communications the country's second and third mobile licenses. Sunrise's legal campaign was based on questioning the criteria used by the government to award the licenses.

The case ended in June of this year when the Swiss federal court confirmed the licenses to diAx and Orange and gave them the green light for the projects.

An enlarged arranging group led by Credit Suisse First Boston (CSFB) started working on the financing of the diAx deal. CSFB had been mandated to arrange the deal in June 1998, at the time of diAx's original award, but fell short of finding interested co-arrangers because of the legal procedures started by Sunrise. While waiting for a response from the authorities CSFB's Zurich team arranged a Sfr200 million bridge financing.

After June 1999 financing was quickly put together and split between a Sfr650 million 7-year term loan and Sfr 50 million 7-year revolving credit.

Credit Suisse, ABN Amro, Banque Nationale de Paris, Banca Nazionale del Lavoro, Banca Popolare di Milano, Barclays Capital, Citibank, Dexia, DekaBank, Fuji Bank, Landesbank Baden-Wurttemberg and Royal Bank of Scotland joined the deal as co-arrangers. Allied Irish Bank and KBC Bank joined as senior lead managers while Banque et Caisse d'Epargne de l'Etat, Basler Kantonalbank, Natexis and Sumitomo acted as lead managers. The deal is priced at 90bp over Libor with a floor of 50bp. Participation fees range from 20bp to 40bp.

Urs Schwendinger, treasurer at diAx in Zurich says: "It has not been easy for us since we ran operations at our own risk for five months while waiting for a response from the Swiss courts." diAx was allowed to run the mobile network from January 1999 but with the prospect of having the license revoked.

Luckily for diAx it never got to that stage. Schwendiger continues: "In the original selection process run by the Swiss government, Sunrise felt it had not been treated fairly and that is why it started legal proceedings against us. The burning issue for us was the time constraints set by the fact that the financing of the loan had been suspended since the start of the legal proceedings. Following the ruling in May this year, we were able to obtain a good deal at a time when European capital markets were saturated with telecom deals."

With Orange still in the market since the first quarter of this year for the financing of a GSM1800 network in Switzerland, this could not ring more true. Deutsche Bank and HSBC are the lead arrangers for the Orange transaction but there is no clear indication of when the deal will proceed towards financial close. Meanwhile Julie Gavin, director in syndication for diAx at CSFB in London says: "diAx was clearly the best bid in place for the mobile license and we felt comfortable that they would retain this."

In the diAx transaction London-based Weil, Gotshal & Manges and Lenz & Staehelin in Switzerland were appointed legal advisers to the lenders. Zurich-based Niederer Kraft & Frey advised the consortium.

Emma Webster, senior associate at Weil Gotshal & Manges in London says: "diAx is a relatively sophisticated borrower keen to use limited recourse financing. The structure of the deal was clear but most of the difficulties regarded the solution of issues concerning certain parts of the Swiss security law. Securitization through the purchase of real estate properties and movable assets has been difficult to arrange because of limits posed by the local legal environment. We had to find a local entity ready to take possession of the movable assets in order to avoid becoming a local tax resident."

Overall the Swiss market for mobile users has been relatively untapped compared to neighbouring markets such as Italy or Germany. Out of the 2.8 million mobile users, diAx has a customer base of 400,000 and its GSM900+1800 network is the second largest in the country after Swisscom, of which the Swiss government is a still a majority shareholder.

Expectations for 2000 are already high despite the fact that the business environment in Switzerland has not been exposed to the same degrees of competition as in the UK and Germany. diAx's Schwendinger says: "Switzerland is always moving at a slower pace than other countries. Nevertheless increasing pressure on the Swiss telecom regulator will bear some positive results from next year. The main expectation concerns the unbundling of the local loop meaning the possibility of renting the national telephone network for end users from Swisscom for a flat rate rather than paying driven connection fees. That would allow us much more flexibility and the possibility of diversifying the products diAx and our competitors can offer to the local market."

CSFB's Gavin is convinced that developments in the Swiss market are looking positive. She says: "Deregulation is relatively new and has not been as strong as in other European countries. And whilst Swisscom is set to remain the dominant player, prospects for the country's telecoms sector are good. The local market is highly valuable and is particularly interesting given the relatively high level of internet penetration leaving scope for more deals to come."

The diAx deal has again shown the huge potential the telecoms sector holds for both sponsors and financiers. Big battles are being fought across Europe for the construction of a pan-European network. Mergers and acquisitions of telecoms groups are daily news for a market that shows no sign of flagging. More will come.