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FTTH Conference 2012Munich 16 Feb 2012, Day 2

Transcript of Raul katz and_roland_montagne

  • 1.Financing FTTH networksStudy for FTTH Council EuropeMunich, 16th February 2012Roland MONTAGNEDirector Telecoms Business Unitr.montagne@idate.orgDr. Raul KatzPresident, Telecom Advisory Services LLCRaul.katz@teleadvs.com 1

2. Agenda A theoretical framework for assessing FTTH financing models Financing models- Publicly-owned utility- Incumbent sponsored- Competitive partnering Most suited FTTH financing models Practices mitigating FTTH financial risk Conclusions2 3. Theoretical Framework for Assessing FTTHFinancing Models 3 4. Three drivers of FTTH project success Project ContextInvestment ModelFinancing Model1. Competitive environment 1. Average revenue per1. Sources of funds (existing players offering user(equity, public funds, broadband access) 2. Wholesale accessdebt)2. Competitive substitutesrates2. Financial investors (VDSL, Docsis 3.0)3. Wholesale/retail mix(institutional, banks,3. Industry structure4. Deployment costsventure capitalists, (number of players, 5. Homes angel investors, existing service-based connected/homes governments) players) passed 3. Lending terms (limited4. Project sponsoror non recourse, rate (incumbent, municipality,and tenor, seniority, alternative servicecollateral, covenants) provider, etc.) 4 5. Project context drives financing modelCompetitive ProjectEnvironment Sponsor Are thereAre providers offering Industry structure (numberany existing competitive substitutesof players, existing service Municipality Telecom Alternative serviceproviders?(VDSL, Docsis 3.0)based players)incumbentprovider Retail ARPU of FTTH project Borrowing capacity Subscriber uptake Credit rating Wholesale ARPU of FTTHInfrastructure renewal and projectmigration versus new Retail/wholesale mix customer acquisition Lending RateFINANCING MODELLending Rate Loan maturity Recourse or non-recourse Covenants VARIABLES5 6. Investment model drives financing modelAverage RevenueWholesale Wholesale/Re Deployment Homesper UserAccess Rates tail MixCostsConnected/Homes Passed Retail ARPU of FTTH project Funding requirements Subscriber uptake Debt to equity ratio Wholesale ARPU of FTTH project Retail/wholesale mix Lending RateFINANCING MODEL Debt servicing Loan maturity Drawing capacity CovenantsVARIABLES6 7. FTTH Financing Models7 8. Typical financing model structureEQUITY INVESTORS LOAN TERMS Financial sponsorsLENDER (S) Aligned with direct faciility Construction and project managers Infrastructure suppliers and contractors PUBLIC FUNDS LOAN TERMS Grants Limited or non recourse Low interest loans Rate and tenor Seniority Collateral Covenants FUNDINGSTRUCTURE DEBT RETURN ON EQUITYREPAYMENT PROJECT INVESTED ENTITYPROJECT CASH FLOWS 8 9. Municipal financing model structure INITIAL INVESTMENT European Regional LONG TERMPRIVATE FEES PUBLIC LENDER Participation shareInvestment Fund PUBLIC LENDER Consortium ofwhen users join the National Government Europeanmunicipalities cooperative Investment Bank Consortium of Municipalities Private Users EQUITY OWNERSPROJECT COMPANY Consortium of municipalitiesBACKBONE LOCAL NETWORKSNETWORK Network cooperativeBUSINESS MODEL Wholesale access sold to operators9 10. Joint Venture financing model structure COMMERCIALLONG TERM PUBLIC LENDERLENDEREQUITYSYNDICATE European Investment BankINVESTORS LOAN TERMS Maturity: 10 years Ring fenced Net debt/EBITDA covenant FIBER Security on network assets, receivables, COMPANYbank accounts, shares Minimum interest hedging requirementsNETWORK OPERATING WHOLESALECOMPANYCOMPANY COMPANYLOCAL NETWORKBUSINESS MODEL BUSINESS MODELCOMPANIES (OpenManagementActive operatoraccess) Agreement 10 11. Most suited FTTH Financing Models11 12. Pros and Cons of Municipal ModelsModel Description Advantages Disadvantages1. Direct Subsidy Public funds pay for Local government retains Ongoing financing requiredFTTH project for an ownership of infrastructure Continued reliance on state aidopen access Local government can Public sector assumes marketbusiness modelensure own needs areriskcovered Competitive encroachment coulderode project viability2. Local Investment Local government No state aid Need to rely on public funds toinvests as would a Local government bears theinvestprivate player in a failure risk alone Risk of impacting local taxesprivate venture More lenient credit terms Potential competitive retaliationdeploying the (rates, maturity) based on Highly dependent on income ofinfrastructuremunicipal profile population3. Private credit Same as above, but No impact on taxes Potentially, but not necessarily,financing funds borrowed from Does not need to reachworse credit terms than fromprivate sources critical mass in order to qualify public sources Service revenues arefor EIB support Forces a period of full serviceearmarked to serviceran by local governmentdebt Risk of bankruptcy unlessfavorable covenants arenegotiated4. Public /Private Similar as above, but Private lenders tend to follow Borrowing from private sourcescredit financingfunds borrowed from the more lenient credit terms could be affected by restrictedpublic and privateof public sources, sometimesaccess to capitalsources enabled by partial riskguarantees No impact on local taxes12 13. Pros and Cons of Public PrivatePartnerships Models Model DescriptionAdvantages Disadvantages1. Debt-facilitation Public entity facilitates No public funds are Potential misalignment ofmodelaccess to tax-exemptplaced at riskobjectives between parties financing Limited leverage of public No commitment to useparty capabilities (ROW, public fundsfacilities)2. Debt- Government Access to better Public funds are placed atguarantee model guarantees debt, financial terms of debt risksecured by privateparty3. Public service Private player deploys Risk is assumed by Subsidy is needed to attractdelegationFTTH network with or outside player the concession holderwithout partial public Lack of commitment ofsubsidy project sponsor might result Player has ain service failureconcession to resellthe passive or activelayers to serviceproviders13 14. Pros and Cons of Incumbent Financing Models ModelDescriptionAdvantages Disadvantages1. Incumbent funded FTTH financing follows Flexibility to manage Competitive retaliation couldmodel classical CAPEX rules ofdeployment according topotentially affect rate of returncarrier, subject to stand-alone internal by forcing price reductionsconventional stand-aloneprocesses Regulatory risk driven bycapital planning rules and wholesale access obligationsprocesses2. Competitive Partnering between Complementarity of Need for regulatorypartnering model Iincumbent and construction, capabilities endorsement(joint venture) or real estate company Market risk mitigated by Obligation to provide opencompetitive co-optationaccess Ability to ring fence creditfacilities, which lowersinvestment risk andprovides capital flexibility3. Competitive Incumbent assumes Market risk mitigated by Regulatory risk prompted bypartnering model II deployment responsibility competitive co-optationalternative carriers(Multi-fibre model) Costs are shared with Potential limited positivecompetitors purchasing response on the part ofaccess to fibre pairsenvisioned partners4. Competitive Partnering between incumbent Reduction in capital Need to gain regulatorypartnering model III telco and alternative providers investment in low density endorsement(Cost-sharing model) Agreement to deploy areas Technology choice can be independently and grant bit-complicated by divergent partner stream access to each other strategies 14 15. Most Suitable Financing ModelsGeographic Mix UrbanSub-urbanRural Municipal/Regio Municipality as an Public/private nal investorcredit financingPublic PrivatePublic servicePartnerships delegationFinancingStrategies Operator-funded Incumbent funded Cost sharing Joint venture model Multi-fibre Operator-funded Public funding program and publicpolicy stimuli15 16. Consider Pooled FinancingApproaches for small FTTH Projects Pooled facility to finance multiple small projects, with severallenders taking their pro rata exposure to each of the projects Target size of each facility: US$ 20 million, sufficient to handle5-6 small FTTH projects Projects would be majority-owned by public sector sponsors,although the private sector could have an ownership stake Facility will have the support from a public lender, which wouldprovide credit enhancements, such as loan guarantees equal to50% of the total amount The pooled facility will be ring fenced Projects could apply, through the pooled facility, to receiveoutput-based aid from public funds Each project will be structured using a project finance approach Project sponsors will develop the FTTH projects with technicaland operational assistance provided by government entities 16 17. Structure of Pooled Financing FacilityPooled Facility Long-Term Manager (e.g. EIB) LoanPublic FundsPooled Financing Credit Output- based Aid if FacilityDebt service Enhancement needed payments Banks andDebt service Funding for Pension FundsrepaymentsFTTH projectsFTTH project FTTH projectFTTH project TechnicalCentralFTTH project Assistance FTTH projectGovernment User feesFTTHservicesFTTH project FTTH projectFTTH projectFTTH projectFTTH subscribers 17 18. Practices Mitigating FTTH Financial Risk 18 19. Variables Explaining Success or FailureProject SuccessProject Failure Demand aggregation across neighboring Limited support obtained to negotiateareas in order to achieve critical mass financial terms with lender syndicate Sharing of deployment costs by Since project was treated as ancompetitors or value-chain players infrastructure subsidy by central government, little attention was paid to the robustness of the business plan Focused FTTH deployment on the part of Competitive retaliation eroded the viabilitythe incumbentof original business plan Financing of FTTH from capex Over-optimism in assessment of customer acquisition Careful developme