O3b has few assets in Africa. Its control centres are in Luxem­bourg and Colorado, while its registered office is in Jersey. Its network comprises eight medium earth orbit Ka-band satellites located 8,000km above the earth’s surface. It will provide com­mu­nications services to a broad swathe of the planet’s equatorial regions.

But under-served and under-connected Africa is probably the biggest potential beneficiary of the emerging markets-focused operator, whose name stands for other 3 billion, or those without access to broadband networks. O3b raised a large proportion of its network’s $1.1 billion cost from Africa-focused lenders and private equity investors. And African borrowers will benefit most from the path laid down by O3b.

Greg Wyler, a telecoms entrepreneur, founded O3b in 2008. The network’s proposition is simple: by relying on cheaper-to-run medium-earth orbiting satellites it can offer capacity at rates that established operators, with more expensive, often geostationary, equipment, cannot match.

O3b’s network will reduce the delay in signals reaching the ground, or latency, from the 500 milliseconds typical with geo­stationary satellites to something nearer 100 milliseconds, a re­duc­tion that internet service providers appreciate. Operators might be able to match or better this themselves with wireless or fibre networks, but at prohibitive cost.

By 2009, O3b had lined up ThalesAlenia space to build the satellites, and ArianeSpace as launch services provider, making the project eligible for cover from Coface, a major player in satellite finance. By September 2009 it had a $465 million buyer’s credit commitment from Coface, and said that it would need another $60 million from commercial banks. It noted it had commitments from telecoms operators equivalent to $600 million in revenue.

At an early stage O3b and its advisers Portland Advisers and HSBC had decided to avoid the high-yield debt market in favour of an ECA-led solution. The high-yield market would in any case have probably not been open to a start-up operator with O3b’s focus by late 2008. In November 2009, SES, an established operator, came in as O3b’s largest shareholder, giving O3b much more clout with lenders and suppliers.

One of the most significant challenges for the financing of a network like O3b’s is that its market niche and geographical focus gives it a lower residual value in the event of an operator default. Lenders, which want to operate satellite networks even less than other infrastructure assets, want to know what a bankrupt network might fetch from another operator.

Lenders, therefore, need to look very closely at O3b’s capacity contracts, making the deal much closer to a classic project financ­ing than an asset financing. Its announced customers include Nigeria’s DirectOn, Vizada, an Africa-focused systems integrator, Global Broadband Solution and Microcom, internet service providers in the Democratic Republic of the Congo, as well as non-African operators in Pakistan and the Cook Islands. Most capacity contracts in the satellite industry tend to be nearer five years than the eight-year term of the debt, though, so lenders have to be comfortable that if these were not renewed there would be some residual value in O3b’s network.

As plans for the O3b network advanced the likely cost of the project increased, and many of the costs would not be eligible for Coface cover. Even when Coface showed some flexibility on eligibility, boosting its facility to $510 million, O3b would need to find additional debt and equity to fully fund the network.

It supplemented the Coface facility (on which Credit Agricole, Dexia, HSBC and ING were lead arrangers) with a combination of additional equity and additional debt, though it needed to avoid increasing the debt burden by so much that it would no longer have a cost advantage against established geostationary operators. The existing shareholders in O3b were SES, Google, North Bridge Venture Partners, Allen & Company, Liberty Global and HSBC Principal Investments (Richard Cole, HSBC’s former head of project and export finance, sits on 03b’s board), which were providing $180 million in equity.

The debt came from a group of development finance institutions, as well as HSBC Principal Investments, providing a mix­ture of senior ($115 million) and mezzanine ($145 million) debt. The senior DFI lenders are the Development Bank of Southern Africa (DBSA, $40 million) the African Development Bank (AfDB, $25 million), Proparco ($20 million), Emerging Africa Infrastructure Fund ($12.5 million), the International Finance Corporation ($10 million) and FMO ($7.5 million). The mezzanine lenders are the IFC ($60 million), AfDB ($25 million), DEG ($20 million), FMO ($17.5 million), EAIF ($12.5 million) and HSBC Principal Investments ($10 million).

The sponsors raised an additional $230 million in equity from both existing investors and new sponsors Development Bank of Southern Africa, Sofina and Satya Capital. These contributions together with the high mezzanine component of the DFI debt, left the project with a sustainable capital structure. The DFIs have some experience with the satellite industry, particularly from funding broadcast ventures.

The final notable aspect of the O3b financing was its insurance package, which is sized to reflect the fact that the operator is not dependent on one satellite. The loss of one satellite would sub­stantially reduce the capacity of the network, though not close it down, so the lenders and their insurance broker were able to buy insurance coverage that reflected a different set of loss probabilities and total losses.

Whether the O3b marks a shift from high-yield debt to DFIs as a source of funding is more difficult to judge. DFIs will not be available for all ventures, and the high-yield market might come back. “Robust high yield markets have in the past been a very competitive financing alternative for similar projects,” says Baker Yanicelli, O3b’s chief financial officer. “That said, our guiding principle in the O3b transaction was to do what was best for the deal, and the ECA/DFI solution was very attractive to us both in terms of certainty of closing and attractive terms.” 

O3b Networks Limited
Status: Signed 12 November, closed 28 November
Size: $1.1 billion
Description: Broadband network based on eight medium earth orbit Ka-band satellites
Sponsors: SES (Lead shareholder), Google, North Bridge Venture Partners, Allen & Company, Liberty Global and HSBC Principal Investments, Development Bank of Southern Africa, Sofina and Satya Capital
Equity: $410 million
Debt: $510 million Coface tranche, $115 million in senior development finance institution debt, and $145 million in mezzanine DFI debt
Coface arrangers: HSBC, ING, Credit Agricole and Dexia
DFI lenders: HSBC Principal Investments, the Development Bank of Southern Africa, the African Development Bank, DEG, Proparco, FMO, IFC and EAIF
Equity adviser: UBS
Debt advisers: HSBC, Portland Advisers
Legal advisers: Milbank Tweed (borrower), Allen & Overy (lenders), Gibson Dunn & Crutcher (SES) White & Case (HSBC & Liberty Global)
Borrower insurance adviser: Marsh
Lender insurance adviser: Jardine Lloyd Thompson
Lender technical adviser: Mott MacDonald
Market consultant: Euroconsult
Tax adviser: Ernst & Young