Finance fears haunt 3G entrants

date: 8th December 2000, source: Dan Roberts, FT.com

Having barely gotten over the high cost of third-generation mobile phone licences, the telecommunications industry is beginning to discover that turning these expensive bits of paper into fully fledged businesses is tough.

The latest worry is that banks may no longer be willing to supply the debt needed to pay for 3G infrastructure, just at a time when shareholders and bondholders are turning their backs on this once popular sector.

Analysts predict that total infrastructure costs across Europe will be between E100bn and E180bn ($88bn-$159bn) depending on the synergies that can be achieved from sharing existing networks.

The burden will fall hardest on new entrants that do not have existing networks and lack cash flow to ease their debt requirements.

Many of the 14 new network entrants in Europe are backed by large foreign investors, such as British Telecom or Deutsche Telekom. But these incumbents have debt worries of their own and are keen for partly owned subsidiaries to raise their finance for themselves.

The tough choices faced by Mobilcom in Germany are typical. It has succeeded in raising a short-term bridge loan, but must refinance quickly to avoid a rising interest rate bill.

Original loan underwriters are already facing unexpected difficulties in passing Mobilcom's debt on to other lenders, as are those syndicating a similar loan for Hutchison in the UK. The fear is that if banks are turning away short-term telecoms debt, how will Mobilcom and others cope in the medium term?

Thorsten Grenz, Mobilcom finance director, said yesterday the group had sufficient unused credit lines to finance interest payments on the E5bn bridge loan secured last summer.

He conceded, however, that part of the loan would have to be refinanced when it matured in next July. This concerns the junior tranche, worth E1bn, with the rest falling due in July 2002. Even before maturity, interest will rise by 25 basis points every quarter for the junior tranche and every six months for the senior part.

"We do carry a heavy debt, and of course the issue of how to refinance it will eventually arise. But it is not a concern at the moment, because any decision on refinancing will depend on market conditions in six months' time," he said.

Mobilcom said it would have a choice between issuing new equity, using a high-yield bond, the preferred option, or a shareholder loan, which might involve France Telecom. Mr Grenz would only rule out the equity route at present because of the recent drop in Mobilcom's share price.

"Technically, Mobilcom is right in that their credit lines are not under threat at present," said one London-based analyst. "But in practice, they will need to think about refinancing soon, because if, come July, they have no facility in place, they will have no choice but to call France Telecom to the rescue."

Mr Grenz rejected rumours that the group had asked France Telecom, which owns 28.5 per cent of Mobilcom, to provide it with additional support.

A further worry for both the banking and telecoms industry is that the true costs and returns for 3G networks remain uncertain.

The head of one of the industry's leading consultants on 3G issues warned yesterday that operators could have underestimated the costs involved.

Rodney Stewart, managing director of Quotient Communications, advised the UK government on its 3G auction and counts all the UK operators among his clients.

"The more we speak to our customers, the more we realise there is a gap in their understanding. The industry is very low down the 3G learning curve.

"The assumption that you can use existing masts for 3G is not necessarily correct. Operators are going to have to do a whole lot of detailed analysis before they start rolling out networks."

He said that in some areas there would have to be a 50 per cent increase in the number of mobile phone masts to provide capacity needed by high-bandwidth 3G services, such as data and video transmission.

"If the operators don't look closely at this, they could find their networks crashing when a user downloads a service that takes up a large amount of bandwidth."

Nevertheless, Janice Hughes, managing director of Spectrum, a consultancy advising mobile operators, said the pessimism sweeping the telecoms investment community was unfounded.

"It's a case of sheep following sheep. Everybody followed the market when it went up, now they're all following it down. There will be a point when sanity returns and investors realise that people will very soon be spending real time and money using 3G services."

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