How banks evaluate and price risk when lending to towercos

One of the principal growing pains facing tower companies, particularly in emerging markets, is the difficult raising affordable debt to finance construction and acquisitions. To learn about some of the criteria commercial banks use when evaluating and pricing provision of credit to towercos, TowerXchange spoke to Krishna Suryanarayanan, Managing Director, Structured Finance at ING Bank NV in Singapore. Krishna has considerable experience of financing towercos in the Asia Pacific region from developed markets like Australia to developing markets like Indonesia, India and Myanmar.

TowerXchange: The independent tower company business model has been described as highly leverageable - how does it look from the lender’s perspective?

Generally speaking that’s a correct statement. The tower business model is one in which you can inherently put on a fair amount of leverage. These are infrastructure assets generating long term recurring Free Cash Flow (FCF), so the business lends itself well to leverage.

However, there can be specific circumstances which determine the extent of leverage. The first is the market itself. It’s easier to raise debt for towercos in countries that are perceived as more stable, with a good regulatory and legal framework. For other countries, such as Myanmar, commercial bank appetite may be limited at this stage because of the nascent regulatory and legal framework and evolving market.

The second factor that can limit leverage is scale. If a towerco is too small, for example if it has built a handful of towers and has a contract for say, 300-500 towers that can be too small for many commercial banks. Ideally if a towerco has a portfolio of 1,000+ towers, then we can talk.

The third factor concerns the bankability of the towerco’s customers and contracts. An opportunity is more bankable if the towerco has substantial contract(s) with high quality, credit worthy anchor tenant MNO(s), well negotiated Master Lease Agreement(s) (MLAs) with protection against inflation, long tenor, and acceptable termination and early cancellation provisions. Of course the pricing provisions in the MLA which determine profitability are also critical.

Other factors include the competitive dynamics in the market and existing / potential co-location on the towers.

In some emerging markets like Myanmar the requirement for some tower operators to also provide power makes the case for investment more challenging as it exposes the towerco to various liabilities concerning Service Level Agreements (SLAs) relating to power supply; the penalties can be substantial, which makes bankers wary.

TowerXchange: How do banks like ING determine the eligibility to receive credit, and the interest rate to be offered, of a given tower venture in a given country?

The spread in the interest margin that the bank would charge depend on the same factors described above which go into overall credit valuation.

There are macro drivers: providing credit to a towerco from a developed market may mean a lower premium for country risk (although this may sometimes be offset by specific liquidity/market characterstics in the relevant loan markets). As the towerco business model extends into developing markets, there is more country risk and more operating risk. Again, much depends on the credit quality of the MNO tenants, structure of the contracts, and the extent of leverage that the operator intends to put on which determines our internal credit assessment of the towerco, and these together with the structure of the financing and liquidity in the market determine the spread we charge them. So factors like whether a towerco is at 3x or 5x EBITDA leverage, structural features including security and covenant package all affect how we would price the loan.

TowerXchange: What special provisions have to be undertaken to provide debt into a market with perceived higher country risk, and with a less mature banking ecosystem, such as Myanmar?

It varies according to the specifics of the market. For example, there is a small subset of commercial banks which have credit appetite for Myanmar and who are prepared to lend into the country – we did that for a client last year in Myanmar which we financed with four other banks.

To mitigate country risk, sometimes banks may choose to buy political risk insurance, which is available from private insurers and multilateral institutions. Other steps which can be taken to mitigate country risk include receipt of certain revenue streams in offshore accounts in acceptable jurisdictions and security over such offshore accounts.

TowerXchange: Does the raising of debt and equity often happen simultaneously because the two communities lean on each others’ expertise to validate an investment?

That’s true to an extent. We look to equity investors as a secondary means of validating a business model, which means that equity investors with a track record and experience of the asset class provide more comfort, particularly strategic equity investors led by people with solid towers experience across multiple geographies – people who have successfully executed and exited tower investments. We give a lot of credibility to the fact that they are putting money behind their assumptions and business model.

We have come into some opportunities alongside pure financial investors with no experience or track record, in such instances the solidity and experience of the towerco management team becomes even more important.

TowerXchange: What is a reasonable timescale from a credit application arriving on your desk from a towerco to that being approved?

A lot depends a lot on what stage the towerco is at. With startups and greenfield implementations we need to do a lot more due diligence to get comfortable with the construction risk, execution and market risk. We need to study the MLA and underlying site lease agreements in detail. We need to study the legal and regulatory environment. All that can take anywhere from three to six months from start to finish. Specific market requirements like central bank and other legal/regulatory requirements need to be worked into the timeframe as well.  Therefore in such cases, additional lead time is needed when raising debt and equity.

Within more established tower markets, with existing towercos with proven cash flows, providing credit to finance expansion or an acquisition can be a lot faster. We’ve turned around deals in less than one month in Indonesia, and under three weeks in Australia for existing operations. Under such circumstances there is simply more information readily available – their track record has been established.

TowerXchange: I understand ING played a pivotal role in helping to raise a vendor finance deal worth tens of millions of dollars. Can you talk a little about vendor finance both as an option for towercos and as an option for credible suppliers to the tower industry?

It is an option worth exploring particularly for early stage towercos that are finding it hard to access the bank market. The vendor finance acts as a kind of bridge, providing time to the towerco in which it can execute its initial orders while it works on longer term financing arrangements. However, the availability of such vendor finance depends a lot on the ability of specific vendors or other agencies like export credit agencies to assume the payment risk, and the universe of vendors / agencies who may be willing to assume such risks is quite small.

TowerXchange: As a towerco or other TMT business matures, how do they need to think about the evolution of their financing strategy, from early stage management and VC, to local debt, international debt, equity, bond issuance, refinancing and maybe IPO or strategic exit?

In general, we see the early phase of growth to a towerco’s first 1,000 towers as more or an equity, VC play – management and early stage strategic investors need to take the risk, get over the hump of the initial 1,000 or so towers, after which the next set of orders is where you can more readily tap the commercial bank market.

International commercial banks will shy away from opportunities where the scale is too small unless the towerco has a firm, well-structured contract with a PO for few thousand towers from an established MNO. We’ve done a greenfield in Myanmar with no existing cash flows but with a solid contract based on which the towerco could attract project finance.

As a towerco scales beyond 1,000 towers and secures its next set of build to suit orders and co-locations, bank debt becomes more easily accessible. If there is a local debt market available, that might be an option, alongside any international banks present in the market or willing to lend into that market. Local and international debt should be equally accessible depending on individual banks’ appetite and criteria.

In the towerco’s growth phase it’s probably still a good idea to retain debt with a smaller group of banks because bank debt is inherently flexible and bespoke.

As a tower company matures and increases to a portfolio of several thousand towers, it’s often time to evaluate what the capital markets have to offer. For example Indonesian towercos have made extensive use of the bond markets, often coinciding with major acquisitions. Existing bank debt could then be partly or fully refinanced in the bond market, which has the benefit of diversifying sources of finance in the capital structure. In addition, bonds can be a good option as towercos mature as they are raised with less covenants and are sometimes unsecured.

A key benefit of bank loans is that they usually provide a free prepayment option which can be used if towercos find cheaper sources of debt.  Towercos can also take on additional bank debt to recapitalise if equity investors want to take money off the table prior to exit. With the benefit of steady FCF generation, a tower company has the ability to deleverage relatively quickly even after taking on such additional debt.