It had all the ingredients of a headline-grabbing deal from the outset – a Google-backed satellite venture to provide internet access to three billion people in Africa and other developing markets without fibre optic cable connections. When emerging market telecoms group O3b Networks finally closed $1.2 billion debt and equity funding in November 2010, in a risky and complex deal with far reaching consequences for development, it was no surprise it was praised as one of the most ambitious commercial space projects of the decade.

But for all its novelty, the deal encapsulates the current sentiment in Africa’s telecoms market, highlighting the pivotal role of ECAs and DFIs and the risk perception of commercial lenders to the sector.

The International Telecommunications Union calculates mobile penetration in Africa grew from 88 million in 2005 to 333 million in 2010 – but that still leaves half the potential market untouched. The UN agency also estimates that the number of people accessing the internet using their mobile in the continent has tripled to 29 million since 2008, and operators now hope to strike gold with their internet offerings. Future growth in Africa telecoms sector, and investor appetite, will come from data traffic, which is predicted to eventually overtake voice traffic, as it has in other developed markets. O3b’s business model rests on selling satellite capacity to telecoms companies, particularly mobile operators, all vying to boost their data offering and allow handset users access to the internet.

Satellites need pre-sales

But despite the compelling numbers and shifting market fundamentals commercial lenders remain wary of ambitious satellite projects. It’s one or the reasons why O3b, for all its celebrated mix of debt and equity investors, has only modest commercial bank exposure. The deal broke down into a $510 million Coface-covered facility provided by HSBC, ING, Credit Agricole and Dexia, $115 million in senior development finance institution (DFI) debt, $145 million in mezzanine DFI debt and $410 million in equity.

Of particular concern to lenders is the creditworthiness and diversity of an operator’s basket of customers. O3b’s business plan is based on serving remote and rural areas without access to broadband. It has signed deals worth between $500 million and $600 million with customers wanting to use its satellite infrastructure, and pledges to sell all of its capacity by launch in 2013. Nevertheless, the amount of satellite capacity coming on stream and demand for that capacity was an issue, say bankers.

Satellite operators that pre-sell capacity before they build a satellite can attract strong support from commercial backers. Intelsat and Convergence Partners’ 15-year $215 million facility for their New Dawn satellite project in South Africa in 2009 benefited from the fact that 50% of the satellite’s transponder units were already under contract, with pre-launch commitments received from Vodacom, Gateway, Zain Nigeria and Gilat Satcom. Pre-orders for satellite capacity totalled more than $350 million, with some contracts for up to 15 years of service.

ECAs important, DFIs vital

The O3b deal also highlighted the role of export credit agencies bringing liquidity and considerably lowering the cost of funding to telecoms projects. The commercial banks that did participate had Coface backing and the French ECA, which has dominated recent satellite projects, provid­ed this commercial cover in exchange for orders for exporters back home. Thales Alenia is building O3b’s first eight medium-earth orbit Ka-band satellites, and Arianespace’s is providing launch services.

It was a similar story in January when Telkom South Africa, Africa’s biggest fixed-line phone operator, signed a seven-year Sinosure-backed loan facility of $127 million (R902 million) to help fund its expansion into the mobile market through its mobile division, 8ta. The equipment for the new network is coming from China’s Huawei Technologies with the ECA providing 95% cover for both political and commercial risks. Absa Bank and Barclays were joint co-ordinating mandated lead arrangers for the oversubscribed transaction. The MLA group also includes Bank of China, China Construction Bank, China Development Bank, Citi, HSBC and SMBC.

In recent years African telecom deals have looked for, and needed, multilateral or development bank support. These institutions in turn favour the developmental and business impact telecoms projects have in Africa. O3B’s deal brought all the big names on board with its US$115 million senior debt facility provided by the African Development Bank, the Development Bank of Southern Africa, the Emerging Africa and Infrastructure Fund, FMO, Proparco and the International Finance Corporation. Its $145 million mezzanine facility came from AfDB, DEG, EAIF, FMO, Proparco, HSBC – the only commercial bank – and the International Finance Corporation. Several of this group have experience financing satellite deals – the IFC has worked on several, while the AfDB was among the participants in New Dawn.

Elsewhere, the Orascom-owned U-Com mobile phone operator in Burundi is currently looking for a $25 million senior A loan from the IFC for a network build-out project. U-Com operates a 2G GSM mobile network that covers 60% of the country, and plans to spend $66.3 million before the end of 2012 to take its coverage to 75%. The Africa Finance Corporation financed $37 million of a $240 million project to lay Nigeria’s Main One submarine cable linking West Africa to Europe.

M&A drives supplier-fuelled arms race

Acquisition financing has bubbled along since Bharti Airtel bought Kuwaiti group Zain’s 15 African subsidiaries for $10.7 billion late in 2010, after agreeing a deal in March of that year. Bharti’s forecast of 100 million subscribers and $5 billion a year in revenue for the company by 2012-13 raised the stakes for Africa’s other players. MTN Nigeria, part of Africa’s biggest mobile group, MTN, responded swiftly to the Bharti threat by signing in June loan agreements worth $2.15 billion to fund its expansion in the continent’s most highly prized market. MTN Nigeria’s self-arranged deal comprised a N250 billion ($1.65 billion) five-year commercial bank tranche backed by 15 local banks and which was increased from N207 billion. The rest of the funding came from a $250 million export credit agency-backed facility to buy equipment from Ericsson and a $200 million buyer’s credit line from ICBC to purchase equipment from Huawei.

Libya’s LAP Green Networks bought 75% of Zambian fixed-line phone operator Zamtel for $257 million in June 2010 and is now laying a fibre optic cable across Zambia to upgrade its network. Movitel, controlled by Vietnam’s unlisted Viettel but including a consortium of Mozambican investors, beat two other firms with its $29 million bid to scoop three licences in the country, where the market is dominated by Mozambique Cellular and Vodacom Mozambique, a unit of South Africa’s Vodacom. The two other bidders were TMM, a unit of Portugal Telecom and UNI-Telecom, a joint venture between Angola’s Unitel and Mozambique’s Energy Capital.

These smaller deals reflect a lack of international commercial bank liquidity for African telecom projects and a slow-down in financing activity. It means Africa’s big operators are now avoiding “management and resource distractions” by chasing after acquisitions in smaller markets, comments one banker, who adds that even cash-flow positive operators, backed by growing revenue streams and higher margins from data, now have to refinance existing debt themselves.

But operators are also increasingly turning to local bank markets, which have demonstrated the ability to provide finance, along with structural innovation. Nigeria’s banks, invigorated by a wave of consolidation after nine defunct banks folded in 2009, showed flair in backing MTN Nigeria’s N250 billion five-year commercial bank tranche, the largest syndicated facility denominated in naira to date.

It also marked another first for MTN’s regional operations, following on from MTN Uganda’s medium-term $150 mil­lion loan programme, which launched in 2009. In Uganda, however, 58% of total commitments were raised from international banks, with the remaining 42% from local and regional institutions.

That said, Nigerian bank enthusiasm for state-owned telecoms company Nitel, up for sale but bedevilled by a decrepit fixed-line infrastructure and huge debt, is less obvious. The New Generation consortium, comprising China Unicom, Minerva Group and GiCell Wireless is the preferred bidder for the state-owned company, after the government accepted its $2.5 billion offer, but the deal has hit the buffers again. As well as its fixed line business, Nitel has a mobile arm MTEL which already owns a GSM license and the SAT-3 submarine broadband cable. “Some com­panies are better run than others – a lot rests on the quality of management,” says one Lagos-based banker.

Infrastructure plays take off

Compensating for the lack of financings for big new network projects has been a flurry of activity around tower infrastructure. Carriers are selling their tower assets to tower operating companies to raise money and cut costs – leasing infrastructure rather than owning and running it. South Africa’s third-largest mobile phone operator, CellC, is selling 1,400 towers to American Tower for $430 million. The company, which operates broadcast and wireless communications sites, also plans to buy an additional 1,800 towers, either under construction or still in the planning stages, in the next two to three years.

In January the IFC announced a $25 million equity investment in Helios Towers Africa to fund the company’s pan-African roll out that includes the purchase of 1,020 towers from Millicom International’s Tanzanian operation, Tigo. “This deal enables Tanzanian wireless operators to outsource non-core tower-related activities and focus capital and man­agement resources on providing higher quality services more cost-effectively,” said Charles Green, chief executive of Helios. In early 2010 Helios Towers Nigeria closed a $250 million IFC-led loan for its $380 million network expansion. The seven-year deal comprises a $200 million senior tranche from the IFC, FMO, DEG, Proparco, AfDB and First City Monu­ment Bank, a $25 million sub-debt facility from IFC and the $25 million in equity from the IFC.

Cable deals in the pipeline include plans to link Tanzania and the Seychelles, and although Nigerian bankers are wary of “toxic” Nitel, SAT-3, for which South Africa’s MTN un­successfully bid, is a tantalising proposition. “There would considerable appetite in the banking community if this space opened up,” said one banker. Main Street Technologies’ Main One Cable, a $240 million, 7,000km cable pro­ject from Nigeria to Portugal via Ghana, Ivory Coast, Senegal and the Canary Islands, went live in 2010. Standard Chartered was financial adviser on the fundraising for the cable, which included a $120 million loan from Nigerian banks.

Despite the opportunities promised with mobile growth and data revenues, the risks are also obvious. Lenders can be tripped up by Africa’s precarious regulatory environment, where governments can unexpectedly unpick mono­polies or promote more competition by issuing another round of licences. The logistics of rolling infrastructure out over large areas in Africa is also factored into the pricing and in many cases companies also have to provide power for their base stations. Rapidly changing technology is another factor that can hit ambitious projects.

It’s one of the reasons why lenders usually ask for a higher proportion equity in deals, though competitive pric­ing for telecoms services means that lenders cannot afford to leave much slack in debt models. O3b had to meet increas­ed costs with a new round of equity raising, rather than going back to lenders, leading to a broadening of its investor group. Development Bank of Southern Africa, Sofina and Satya Capi­tal, a private equity firm backed by Mo Ibrahim, joined existing investors. n