Telecoms operators across the globe will face higher financing costs as they issue new debt to the market, or try to refinance their existing debt, potentially delaying new network deployments and upgrades, according to an ITU report “Confronting the Crisis: Its impact on the ICT Industry.”
“One of the more obvious effects of the credit crunch is a reduction in and more expensive credit for investment. A prolonged credit crunch and financial crisis could potentially starve operators of the capital investment needed for upgrades to network infrastructure,” the report said. “Many network upgrades envisioned for the next two-three years are financed through debt and may stall due to lack of available credit.”
The report added that those operators that have been able to get credit are only able to do so at much higher interest rates.
“Where credit is available, interest costs have risen sharply. For exam- ple, US carrier Sprint Nextel recently renegotiated its debt from its origi- nal credit line of US$6 billion at the London reference interest rate LIBOR plus 0.75% for a new line of US$4 billion at LIBOR plus 3%, depending on the company’s debt ratings,” the report said.
The situation is expected to be more critical for operators with soon maturing debt. According to estimates by Deutsche Bank cited in the re- port, European incumbents alone have some EUR21 billion of bonds ma- turing soon in 2009, with a further EUR26 billion of other financial liabili- ties, debt which may need to be refinanced over the coming year.
“The difficulties in the credit market have seen refinancing costs rise sharply, with recent telco debt issuance being secured at spreads of up to 4.75% in late 2008, 3-4% higher than the financing available pre-crisis (depending on firms’ debt ratings),” the report said. “Where bonds can be refinanced, it is clear that they are incurring higher interest costs.”
One possible result of the higher debt cost is a slowdown of operator capex. Estimates by ABI Research from the report suggest that total telco capex will slow to a growth rate of 7% in 2009, down from 8.3% between 2008 and 2007.
FDI SHIFT
Another direct result of the credit crunch is that foreign di- rect investment (FDI) for developing markets will shrink dramatically, with potentially negative effects on new projects in developing markets.
According to the United Nations Conference on Trade and Develop- ment, privatization and greenfield investments by trans-national corpora- tions accounted for 83% of projects with private-sector participation from 1996-2006 in developing markets. In that period, foreign companies in- vested over US$100 billion in telecoms projects in developing countries.
“Today, companies are likely to face difficulties in raising the neces- sary funds to finance their overseas investments,” UNCTAD said. “The decline is mostly due to tighter financing – venture capitalists and lending institutions are now more cautious, with potential negative effects on FDI in telecom. A shortage of lending will make it more difficult to finance large M&As and planned privatizations may be postponed as a result of the crisis.”
One bright spot in this area is that new players with strong cash posi- tions can now seize the opportunities to expand.
“Investors that are well endowed with cash may find interesting opportunities as a result of the crisis,” UNCTAD said. “TNCs backed by home- country governments with large current account surpluses (such as in the Middle East and China) may be in a better position to seize investment opportunities.”
Even if those companies don’t invest in assets outright, a strong cash position will allow them to provide financing for customers, giving them a strong position in contending contracts globally.
Just this week, the Chinese government approved an export credit worth US$1.1 billion to the country’s two telecoms equipment vendors, Huawei and ZTE. The grant, by the Export-Import Bank of China, will provide Huawei with US$600 million and ZTE with US$500 million in capital to finance export contracts, according to media reports.
