The Chief Financial Officer (CFO) is critical to a company having the financial means to achieve its vision and plan. Working alongside the CEO, a towerco CFO is the main link to investors, banks, lenders, credit rating agencies, and shareholders, and the one in charge of accessing and retaining capital with the ultimate goal of optimising the cost of capital. Naturally, the role of the CFO as well as the options available to ensure financial stability varies depending on the country of operations, geographical risk, regulatory environment, scale and future plans of the towerco, ownership structure, current liquidity, and more. With Asia being one of the most active regions for towerco start-ups, growth and deals, TowerXchange connected with multiple industry stakeholders to shine a light on the role of the CFO.
Role of towerco CFO
Compared to other industries, the towerco business is less about working capital and capex cycles, and more about the cost of capital. Towercos are highly leveraged companies who act as providers of capital to operators through build-to-suit (BTS) programmes. This means towerco CFOs need to have a strong understanding of how to optimise the cost of capital, debt levels and internal rate of returns (IRRs), and continually look at managing the balance sheet to minimise costs and operating expenses. This is perhaps best exemplified by what one industry source pointed out, that unbeknownst to most, the biggest cost for Indonesia’s Tower Bersama is actually interest costs.
Optimal balance sheet and capital structure management are required due to the long-term nature of investments and contracts that towercos undertake. Once contracts are locked in for five to ten years, there is limited opportunity to change; towero CFOs have little room for error from the outset.
The CFO shepherds the financial management of the company, with a key role in coordinating capital raising and with credit rating agencies. They need to be good at working with investment banks, coordinating investors and shareholders and have a strong understanding of corporate finance and the financial instruments available to them.
The team under the CFO can then support him/her with respect to accounting and reporting. CFOs keeps the management team grounded, ensure procedures are followed and investment assumptions are well supported and tested. It goes without saying that the CFO’s partnership with the CEO is critical to the success of both. At the same time, outside of their company, the CFO can be instrumental in mitigating the concerns of a customer’s CFO and determining which is the best course of action to take.
Having the support of the right, best qualified team matters, but also ensuring that the right systems and procedures are in place to manage the asset register, documentation and reporting; this is critical to the CFO having the appropriate conversations with stakeholders and getting good terms when they are fundraising.
What has changed for the towerco CFO in recent years?
“With the conversion to REIT status of the US-listed towercos, the CFO role has expanded to include outreach to REIT investors and conversion, where necessary, of internal and external reporting systems to conform to REIT standards.” – Senior analyst
What is a REIT? Definition by the National Association of Real Investment Trusts
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types with regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends. The REIT is the most common structure for a towerco to take and was instigated by Crown Castle and American Tower. The model is now being emulated all over the world.
Countries in Asia that have adopted the US REIT approach
Countries in Asia considering REITs
considering-reit-contries.png
What might be some of the markets in Asia of interest to investors?
“It depends on a number of factors, but some of the core ones are regulatory, tele-density and which phase of technology evolution the country is in, i.e. 3G, 4G, and of course the competition. Whilst competition is healthy, irrational players can significantly impact the market dynamics. MNO consolidation could also cause concern in terms of market growth as there is usually a pause to ensure integration is done first. Markets in which there is growth in terms of both penetration and technology would be of high interest.” – Established towerco CFO #1
The stages of financing
Much like companies in other industries, towercos in their initial phases of growth raise capital privately, usually through angel investors, private equity (PE) or venture capital (VC). When they reach scale and have the balance sheet to support it, they can start to engage with the banks to provide or underwrite capital, perhaps first on a bilateral basis and then through a club deal or syndicated loan if they require debt financing. They may also have the option to access the local or US dollar bond markets before or after they go public, such that they are not dependent only on bank debt, and sometimes they do this to achieve longer tenor debt. Eventually they could IPO and raise equity capital from institutional investors and the public markets.
The role of the CFO through the different stages
When a towerco is starting up and raising capital, the CEO at this point is typically the visionary, while the CFO needs to be practical, conservative, and rooted in current reality. Typically they tend to work very closely at this stage of capital raising and may well attend every meeting together. As the company progresses to access financing from banks and lenders, the CFO is now the person who is dispatched to liaise with the financiers and promote the company’s best interests, whereas the CEO becomes more of a figurehead. One of the first ways a towerco raises capital is often through private equity or venture capital, and when the time comes time for these investors to exit, the CFO must decide whether they will refinance or IPO and take responsibility for the marketing of the company to the potential new PE / VC investors, or the capital markets.
When does a towerco decide to buy versus sell?
“It really depends on a towerco’s shareholders whether they are buyers or sellers. With private equity firms you know that they need to monetise one day. Strategic investors typically are committed to their towerco for a long time, but sometimes the synergies can be very compelling or they need the cash, so they sell out.” – Senior banking executive #1
Some regional examples of debt financing for towercos
In December 2016, China Tower Corporation (CTC) issued its first asset-backed note (ABN) with China Merchants Bank as the lead underwriter. The 1-year ABN at 2.86% per year allowed CTC to raise CNY¥5bn on the back of its receivables from the three operators. CTC is also looking to IPO on the Hong Kong Stock Exchange, originally with a desired 2017 year-end listing, but increasingly more likely in Q1 of next year (2018).
Some of the Independent towercos in China are accessing financial leasing at rates of 6.5 to 8.0%, with an average of 3-5 years on the projects according to one of our sources.
In April 2017 Tower Bersama secured IDR700bn in bonds and then followed up in August with three-year bonds at 8.4% interest rate, worth IDR500bn; this was led by Indo Premier, DBS Vickers and CIMB Securities. The towerco also secured a US$300mn loan facility extension to June 2022 this year. In May, Fitch Ratings affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) for Tower Bersama at ‘BB-’. At the same time, Fitch Ratings Indonesia had affirmed the National Long-Term Rating and national senior unsecured rating at ‘AA-‘(idn).
In November 2016, Protelindo executed a bond issuance of IDR800bn, with tenor of 3.5 and 7 years, which partly helped to lower its foreign currency debt exposure.
Malaysia-based edotco raised US$700mn in late December 2016 through to early 2017 with Khazanah Nasional Berhad, Innovation Network Corporation of Japan and Kumpulan Wang Persaraan. This was a private placement and totaled 37.6% in equity for the three funds.
Apollo Towers Myanmar secured a US$250mn loan facility from US government agency Overseas Private Investment Corporation in mid-2016, while private equity firm TPG invested close to US$200mn.
What is the biggest gratification for a towerco CFO?
“Helping the company expand in a financially sustainable manner that ensures we can keep our commitments to our customers and employees.” – Established towerco CFO #2
Challenges and opportunities for the towerco CFO
Towerco CFOs often struggle with getting local banks to understand the tower model. These banks may see new tower builds as capex for example. Or they look at the last full year audited EBITDA (earnings before interest, tax, depreciation and amortisation) rather than taking LQA (last quarter annualised). As a result, towercos may start with international banks who have experience in other markets.
The good news for towerco CFOs is that over the past few years, the finance community has grown in its familiarity and comfort with the sector, resulting in more financial institutions entering the market with dry powder. The current favourable financial environment also means more competition among capital providers, more financial instruments and more availability for towercos. For example, a larger towerco with scale could tap into the bond market (public debt finance), where the lender is not a bank but debt investors. International institutional investors are also starting to express interest in Asia, having become familiar with the tower sector in the US and Europe. The geographical / political risk profile of Asia is relatively low too, which bodes well.
Another challenge is around the management of currency exposure, and hedging becomes critical if the towerco has foreign debt. One source noted that CFOs can struggle to get hedging right, and the existing advice from banks may not be sufficient to optimise their strategies.
When it comes to acquisitions, towercos that are involved with sale and leasebacks (SLBs) have much more complexity to deal with than a towerco-on-towerco transaction. With SLBs, there is not only the valuation of the assets, but other factors such as escalators, inflation, and the macro environment to consider.
Whether towercos are raising equity or debt, due diligence will be required, at which point the CFO and towerco team often struggle to get all the documentation in place, especially when going from being privately held to publicly listed. This includes MLAs with operator clients, ground lease contracts, environment licenses, and more. The gaps could impact not only the funding or financing process, but also the towerco’s credit rating. Due to varying levels of public administration around land ownership compared to markets like the US or Europe, towercos of all sizes in Asia face significantly more hurdles on securing documentation.
What might be some of the markets in Asia of interest to investors?
“It partly depends on market dynamics, the stability of cash flows, etcetera. A market with competition in pricing, more towerco players, and unclear direction of consolidation means investors may be more reluctant to deploy capital. If the market is more stable and with clear commitment by operators to expand their networks, then investors are interested.” – Senior banking executive #2
For more in-depth discussions on the role of the CFO and towerco funding and financing, join us at the TowerXchange 4th Annual Meetup Asia, to be held 12-13 December, 2017 in Singapore at Marina Bay Sands.
