 | Issue: | Latin America IV 1997 |
| Article no.: | 7 | |
| Topic: | Public Capital Markets: Financing Competitive Telecommunications in Latin America | |
| Author: | James Allen | |
| Title: | Not available | |
| Organisation: | Morgan Stanley, Dean Witter, Discover & Co., USA | |
| PDF size: | 20KB |
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Article abstract
At the same time that the Latin American telecommunications markets have been opening to competitive entrants, the international capital markets have become increasingly open to financing emerging markets companies. In addition to obtaining debt financing, businesses can also looked to the equity markets. The new emerging markets paradigm focuses on finding good companies to invest. This article highlights several key factors in assessing the quality and attractiveness of a company seeking money.
Full Article
Competition Drives the Need for Capital As liberalisation in Latin American telecommunications gathers steam in many of the region’s markets, the field is being opened to a host of new players. New companies are appearing all over the region to exploit the tremendous potential of Latin America’s under-served telecommunications markets, usually in competition with the former state-owned monopoly. While concentrated in the wireless segment, which has been the first to be opened to competition in most countries, relatively new entrants have also emerged in long distance, private line, value added services, Internet, and even local telephone services. Nearly all of these new entrants, which we will call ‘competitive telecommunications companies’, have large capital needs and business plans which show several years of negative cash flow as operations ramp up. Capital Markets Step in to Fill the Need At the same time that many Latin American telecommunications markets have been opening to competitive entrants, the international capital markets have become increasingly open to financing emerging markets companies. As recently as 1993, foreign issuers accounted for just 7% of total US public non-investment grade corporate bond offerings, but In the first nine months of 1997 the comparable figure was 17%. Perhaps even more importantly for competitive telecommunications companies, the US non-investment grade bond market has become extremely receptive to competitive telecommunications stories and has funded numerous competitive telecommunications operators that have emerged in the OS since 1995. Businesses that have promising growth trajectories, but lack the cash flow characteristics generally considered necessary to support debt financing, have been able to borrow using zero-coupon or overfunded structures. These developments have resulted in the increase in telecommunications issuance (as a percentage of total non-investment grade bond issuance) from under 3% in 1993 to over 17% at the end of November. The increased familiarity of non-investment grade bond investors with competitive telecommunications companies and with non-cash pay instruments enabled several Latin American issuers with no current cash flow to raise debt funds for build-outs in the public (or the technically private Rule 144a) markets during 1997. From January through November, a total of 8 non-investment grade debt issues were completed by Latin American telecommunications issuers or companies with operations based largely in the region. Of these, only one was from a privatised ‘incumbent’, CANTV, and six were either zero-coupon or overfunded issues. McCaw International, a subsidiary of US Enhanced Specialised Mobile Radio (ESMR) powerhouse Nextel Communications, had the largest issue of the group: US$ 500 million in zero-coupon notes in March 1997 to fund the build-out of ESMR systems in Argentina, Brazil, Mexico and certain Asian countries. Considering the uncertainties that had surrounded the viability of the Motorola iDEN technology that McCaw intends to use, as well as the regulatory uncertainties surrounding the company’s ability to use its ESMR frequencies in Brazil to provide interconnected mobile telephony, the deal’s success shows the enthusiasm of investors for credible telecommunications growth stories in emerging markets. Also notable was Tricom’s US$ 200 million issue. Tricom is the competitive telecommunications company in the Dominican Republic. Except for a small number of Chilean companies, Tricom is unique among Latin telecommunications companies in that it is already providing local telephone service in competition with the long established former monopoly. Proceeds from the bond offering are to be used primarily to continue the build-out of Tricom’s local network. The recent issue by Telesystems International Wireless (TIW) of Canada was the first bond market funding related to the B-band cellular licenses being awarded in Brazil. Proceeds are to be used largely to fund TIW’s participation in a consortium composed of TIW, Bell Canada International (BCI), Banco do Brasil and several Brazilian public-sector pension funds which won the B-band cellular license for Brasilia and the central region. In addition to obtaining debt financing in the international capital markets, competitive Latin American telecommunications companies and their shareholders have also looked to the equity markets. While the equity markets were not a major source of capital for competitive Latin American telecommunications companies in 1995 and 1996, BCI tapped them in its subsidiary initial public offering in October 1997, obtaining US$ 279 million of new capital to plough into the development of its numerous early stage wireless projects in Latin America and Asia. In addition to this, it recently won a B-band license in Brazil. BCI’s single largest asset is Comcel, one of two cellular operators in the central region of Colombia. Getting Over ‘Asian Flu’ While investor enthusiasm for competitive telecommunications stories ran high during most of 1997, it was seriously curtailed by the financial crisis in Asia, particularly after the Wall Street correction in late October. Spreads on traded bonds widened significantly even for US high yield telecommunications companies, and Latin American issuers with bonds outstanding were hit by the major sell-off in emerging markets paper. However, as the Asian crisis appears to have hit bottom, and assuming Brazil holds the line on its currency as we strongly believe it will, the markets should be open for high quality Latin American issuers, including telecommunications companies, as early as January 1998. The New Paradigm for Emerging Markets Investing While we expect debt spreads in 1998 to remain higher than their third quarter 1997 lows, we also believe that market investors will increasingly discriminate between companies based on comparative analysis. To paraphrase Morgan Stanley’s Emerging Markets Strategist, Jay Pelosky, the old way of selling the emerging markets – as a country-based growth opportunity – is over. The new emerging markets paradigm will increasingly replicate that of much of the rest of the world: find good companies and invest in them. Key Investor Concerns Given the volatile nature of emerging markets over the past few months, debt investors will be more focused than ever on several key factors in assessing the quality and attractiveness of a company seeking financing: · Execution – How credible is the business plan? Does management have a track record in meeting or exceeding its plans? · Currency exposure – How vulnerable is the business to a devaluation? · Asset coverage – How much are the hard (or saleable) assets of the business worth in relation to the debt? · Equity sponsorship – Who are the equity holders? What operating expertise do they have? What local market knowledge and presence? Most importantly, how much equity capital have they paid in to the company and what is their ability to contribute more if it should be necessary? Conclusion An additional, and critical factor to most investors, is the liquidity of the bond issue – will there be a market for the bonds in case the investor needs to sell them to raise liquidity? The liquidity is primarily governed by the lead underwriters’ ability and commitment to make a market in the bonds after the issuance is completed. Issuers should weight this factor heavily when choosing an underwriter.
