Financing Network Expansion

Emma Okonji examines the rate at which telecoms operators approach banks for loan as option for network expansion

From the inception of Global System for Mobile Communication (GSM) in 2001, telecoms operators have always relied on the banks for loan facilities for their network expansion. This is because it is a capital-intensive project.
Also, the banks are always willing to release such huge capital for telecoms’ network expansion, probably because of the huge interest rate that is accrued to such loan facilities.

Aside bank loan facilities, another option available to telecoms operators is the sale of shares through Initial Public Offering (IPO), but none of the operators can go close to using IPO to raise capital because they are not listed on the Nigerian Stock Exchange (NSE).

What the telecoms operators have done since inception was to take advantage of loan facilities from local and international banks for network expansion, not minding the interest rate, provided repayment of the loan was spread within a reasonable number of years.

Nevertheless, repayment of such loan became a major issue owing to the severe currency crisis the country faced about three years ago.

This has compelled telecoms operators to now focus on naira-denominated loan facilities, as against the dollar -denominated loans.
It was for this reason that MTN, last week negotiated and secured N200 billion loan facility from 12 local banks.

Issues with dollar denominated loan

Before now, there was no challenge with dollar denominated loan facilities because access to foreign exchange wasn’t an issue.

But the situation changed in 2016 when the Nigerian economy slipped into recession after a significant drop in crude oil price, which is the country’s major forex earner.

Etisalat Nigeria, which now trades as 9mobile, became a victim of the situation.
The telecoms company had in 2013 secured $1.2 billion from 13 local banks for network upgrade and expansion.
However, citing economic downturn of 2015-2016 and naira devaluation, which negatively impacted on the dollar-denominated component of the loan, the former Etisalat Nigeria fell short of repaying the loan, a situation that compelled the banks to plan a possible takeover of the telecoms company.

But the intervention of the Nigerian Communications Commission (NCC) and the country’s financial regulator, the Central Bank of Nigeria (CBN), saved the situation.

Following the inability of the telecoms company to continue repayment of the loan in dollar denomination within the stipulated timeframe, it offered to continue the payment of the loan in naira denomination. But the banks refused, insisting that repayment must continue uninterrupted in dollar denomination. The banks threatened to take over the operations of the telecoms company, until it was able to recoup the last dollar of the $1.2 billion loan facility.
The threat from the banks was so strong that the board members of the telecoms company, including its Chief Executive Officer and its Chief Financial Officer, had to resign and a new board constituted, following the withdrawal of the parent body of the telecoms company.

Barclays Africa was later appointed to sell the telecoms company to a willing buyer who will be ready to invest in the telecoms company and offset the bad loan. Although the process of acquiring the telecoms company is still on course, the preferred bidder is yet to pay the final bid money to take full acquisition of the telecoms company, owing to uncleared regulatory issues.

The MTN Facility

Having drawn its lessons from the ongoing 9mobile financial crisis, MTN Nigeria was careful in its negotiation to secure the loan.

The telco insisted the loan must be naira-denominated in order to avoid making the same mistake that one its competitors made.

Therefore, after its valid negotiations, the loan was approved for MTN Nigeria, a move that many financial analysts have commended.

The medium-term loan facility, which is structured with a two-year moratorium and a repayment plan of five years, was signed by the representatives of all 12 banks and the Chief Executive Officer of MTN Nigeria, Mr. Ferdi Moolman.

The banks were First Bank Nigeria, Union Bank, Citibank, Diamond Bank, Ecobank, Fidelity Bank, FCMB, FSDH Merchant Bank, Rand Merchant Bank, Standard Chartered Bank, Stanbic IBTC Bank and UBA.

FBN Quest acted as the facility agent.

Speaking at the signing ceremony, Moolman expressed enthusiasm at the completion of the agreement, saying it showed MTN’s commitment and confidence in Nigeria, as well as the strength of the strategic collaboration between MTN Nigeria and local financial institutions that will help deepen and broaden the provision of Information and Communications Technology (ICT) services in Nigeria.

According to him, the facility would be used to expand the telco’s network to more rural areas, including internet expansion.

General Manager, Corporate Treasury Finance at MTN Nigeria, Mr. Ishmael Nwokocha, said the facility would also help MTN Nigeria to further expand its data network, especially its 4G network expansion, which it pioneered in 2016.
Executive Director, Corporate Banking at First Bank of Nigeria, Mr. Remi Oni who represented the bank at the signing ceremony, said the financial institution believes so much in the credibility of MTN, hence it decided to put its money to support the telecoms company. “We congratulate MTN for this feat and we thank other banks who also believed in MTN Nigeria to be part of the 12 lending banks,” Oni said.

Also, the Executive Director, Union Bank, Mr. Emeka Okonkwo, who represented his bank, said the partnership with MTN Nigeria is more than rendering financial services.
“We want MTN Nigeria to use our banking platforms to achieve its goals and objectives,” Okonkwo said.

MTN’s Previous Loans

Describing bank loan as a necessary option for telecoms network expansion, Nwokocha said every business needs additional money for network expansion to remain competitive.
“Every business is advised to do a little bit of borrowing to expand business. You cannot always rely on money you generate internally or from shareholders to run the business successfully, otherwise, you limit expansion until when you have the money available.
“But if you are ambitious enough, you cannot limit yourself to only what you generate. To accelerate expansion programs, telecoms operators have to do bank borrowing and that is what MTN has been doing in the past,”Nwokocha said.

According to him, in 2013, MTN raised N329 billion loan facilities from banks but explained that the six years payment loan plan would be winding down by next year. “So, we have kept to the loan agreement repayment plan and it is just a small amount that is left to be settled by next year,” Nwokocha added.
Explaining how previous loan money was spent, Nwokocha said every loan secured in the past had been invested in network expansion and upgrade.

“Our plan is to do modernisation of our network that will allow us position the network for the data consumption that we will see in the future. The telecoms space is still largely a voice dominated market especially in the rural area of Nigeria. But as we transit across, we are modernising from a basic voice network to a digital network and we will keep investing in digital network in Nigeria,” he said.

“There is a lot of talk on broadband penetration in Nigeria so there are opportunities for us to grow the market. A lot of this money will go into data expansion. We have the most expansive fibre network in the country, but most times people cut them and there are disconnections that result in poor service quality,” Nwokocha added.

Telcos’ Previous Loans

Bharti Airtel, which operates in over 20 South Asia and Africa countries, including Nigeria where it operates as Airtel Nigeria, in July this year, plan to raise about $1 billion through overseas loans, to free up cash for capex investments needed to expand its 4G network.

“The company may be able to raise the money by August. It makes sense for the company to go for an overseas syndicated loan,” the source further said.

About six banks are expected to arrange the offshore credit for the telecoms company.
Bharti Airtel, which is planning to spend Rs 24,000 as capex in this fiscal year ending March 31, 2019, may raise two-three year money, which will be priced after adding a mark-up or spread over the London Inter-Bank Offered Rate (LIBOR), a benchmark gauge.

Experts said companies this year are shying away from the dollar bond market as a spike in US Treasury yields has helped increase the borrowing cost. In the past one year, the US Treasury benchmark yield shot up 50 basis points to 2.87 per cent.

NatCom Development and Investment Limited, which acquired the defunct Nigerian Telecommunications Limited (NITEL), and trading as ntel, had in 2016, planned to raise over $1 billion to expand its operations across Nigeria.
It’s former Chief Executive Officer, Mr. Kamar Abass, who made the disclosure, had said the company planned to use the additional funds to invest in a 4G mobile-broadband network by 2020.

“We are speaking to investors and to banks who are interested in a growth story for Africa. “We are seeing the very beginnings of a shift from a voice-oriented communications market in Nigeria to one that will be dominated by mobile broadband,” Abass said.

ntel paid $252 million in 2015 to acquire the assets of NITEL, the once-dominant state telephone company in Nigeria and its mobile arm, MTEL.

Although ntel positioned itself to be a leading provider of high-speed data, high-definition voice, and video services to its customers, the telecoms company is currently struggling to expand its services to more cities, while in search of fresh investors that will invest into its telecoms business.
Indeed, telecoms operators are in dire need of funds for network expansion, but they have come to realise that naira denominated loan facility remained a better option for easy repayment.