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Roland Montagne: Webinar "Financing FTTH networks"


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DigiWorld by IDATE, TAS (Telecom Advisory Services) and the FTTH Council Europe presented the study "Financing #FTTH networks" during a webinar animated by Roland Montagne (Head of the Telecoms Business Unit at IDATE)

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Roland Montagne: Webinar "Financing FTTH networks"

  1. 1. Financing FTTH networksStudy conducted on behalf ofFTTH Council EuropeWebinar, 19th June 2012 Roland MONTAGNE Director Telecoms Business Unit, IDATE Dr. Raul KATZ President, Telecom Advisory Services LLC 1
  2. 2. Agenda► FTTH Projects selection► Theoretical framework for assessing financing models - Three drivers of FTTH project success - Project context drives financing model - Investment model drives financing model► FTTH Financing models structure► Most suited FTTH Financing Models - Municipal models - Public Private Partnerships models - Incumbent Financing Models - Operator funded combined with public policy stimuli► Most Appropriate Financing Models► Consider Pooled Financing► Practices Mitigating FTTH Financial Risk► Recommendations 2 Study conducted on behalf of FTTH Council Europe
  3. 3. FTTH Projects selection 3
  4. 4. Taxonomy and sample of projects studied Formalization of taxonomy of financing approaches: two dimensions Geographic dimension: Urban, Suburban and Rural Financing strategies dimension: principal project sponsor and funding models Sampling matrix Geographic Mix Urban Sub-urban Rural Municipal Government Funding Financing Strategies PPP Operator-funded Operator-funded and public policy stimuli Source: IDATE and TAS LLC 4 Study conducted on behalf of FTTH Council Europe
  5. 5. Positioning of projects studied A dozen of project interviewed and positioned in the Matrix Projects selected in: Sweden, Finland, France, U.K, Germany, Spain, Switzerland, Latvia, Andorra, Lithuania and Netherlands Final Sampling matrix Geographic Mix Urban Sub-urban Rural Municipal  Project A  Project B  Project C  Project D Financing Government Funding  French National Very High Speed Plan Strategies  BB Delivery UK PPP  Project E  Project F Operator-funded  Project G  Project H  Project I  Project J Operator-funded and  Project K public policy stimuli Source: IDATE and TAS LLC 5 Study conducted on behalf of FTTH Council Europe
  6. 6. Theoretical framework for assessingfinancing models 6
  7. 7. Framework for assessing Financing models Three drivers of FTTH project success Project Context Investment Model Financing Model1. Competitive environment 1. Average revenue per 1. Sources of funds (existing players offering user (equity, public funds, broadband access) 2. Wholesale access debt)2. Competitive substitutes rates 2. Financial investors (VDSL, Docsis 3.0) 3. Wholesale/retail mix (institutional, banks,3. Industry structure 4. Deployment costs venture capitalists, (number of players, 5. Subscribers/homes angel investors, existing service-based passed governments) players) 3. Lending terms (limited4. Project sponsor or non recourse, rate (incumbent, municipality, and tenor, seniority, alternative service collateral, covenants) provider, etc.) Source: IDATE and TAS LLC 7 Study conducted on behalf of FTTH Council Europe
  8. 8. Project context drives financing model Competitive Project Environment Sponsor Are there Are providers offering Industry structure (numberany existing competitive substitutes of players, existing service Municipality Telecom Alternative service providers? (VDSL, Docsis 3.0) based players) incumbent provider • Retail ARPU of FTTH project • Borrowing capacity • Subscriber uptake • Credit rating • Wholesale ARPU of FTTH • Infrastructure renewal and project migration versus new • Retail/wholesale mix customer acquisition • Lending Rate • Loan maturity FINANCING MODEL • Lending Rate • Recourse or non-recourse • Covenants VARIABLES Source: IDATE and TAS LLC 8 Study conducted on behalf of FTTH Council Europe
  9. 9. Projects positioning in two dimensional context matrix FTTH Projects Contextual Matrix No competition Existing ADSL, Cable Existing VDSL and/or or 3G service Docsis 3.0 Municipality or local  Project D  Project F  Project B government  Project A  Project C  Project E Alternative operator  Project I  Project J  Project K Incumbent  Project G  Project H Low contextual Risk Medium Contextual Risk High Contextual Risk Source: IDATE and TAS LLC 9 Study conducted on behalf of FTTH Council Europe
  10. 10. Investment model drives financing modelAverage Revenue Wholesale Wholesale/Re Deployment Subscribers/Homes per User Access Rates tail Mix Costs Passed • Retail ARPU of FTTH project • Funding requirements • Subscriber uptake • Debt to equity ratio • Wholesale ARPU of FTTH project • Retail/wholesale mix • Lending Rate FINANCING MODEL • Debt servicing • Loan maturity • Drawing capacity • Covenants VARIABLES Source: IDATE and TAS LLC 10 Study conducted on behalf of FTTH Council Europe
  11. 11. FTTH Financing Models Structure 11
  12. 12. Typical financing model structure EQUITY INVESTORS LOAN TERMS • Financial sponsors LENDER (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 FUNDING STRUCTURE DEBT RETURN ON EQUITYREPAYMENT PROJECT INVESTED ENTITY PROJECT CASH FLOWS 12 Study conducted on behalf of FTTH Council Europe
  13. 13. Most suited FTTH Financing Models 13
  14. 14. Pros and Cons of Municipal Models Model Description Advantages Disadvantages1. Direct Subsidy  Public funds pay for  Local government retains  Ongoing financing required FTTH project for an ownership of infrastructure  Continued reliance on state aid open access  Local government can  Public sector assumes market business model ensure own needs are risk covered  Competitive encroachment could erode project viability2. Local Investment  Local government  No state aid  Need to rely on public funds to invests as would a  Local government bears the invest private player in a failure risk alone  Risk of impacting local taxes private venture  More lenient credit terms  Potential competitive retaliation deploying the (rates, maturity) based on  Highly dependent on income infrastructure municipal profile and density/distribution of population3. Private credit  Same as above, but  No impact on taxes  Potentially, but not necessarily,financing funds borrowed from  Does not need to reach worse credit terms than from private sources critical mass in order to qualify public sources  Service revenues are for EIB support  Forces a period of full service earmarked to service ran by local government debt  Risk of bankruptcy unless favorable covenants are negotiated4. Public /Private  Similar as above, but  Private lenders tend to follow  Borrowing from private sourcescredit financing funds borrowed from the more lenient credit terms could be affected by restricted public and private of public sources, sometimes access to capital sources enabled by partial risk guarantees  No impact on local taxes 14 Study conducted on behalf TAS LLC Council Europe Source: IDATE and of FTTH
  15. 15. Pros and Cons of Public Private Partnerships Models Model Description Advantages Disadvantages1. Debt-facilitation  Public entity facilitates  No public funds are  Potential misalignment ofmodel access to tax-exempt placed at risk objectives between parties financing  Limited leverage of public  No commitment to use party capabilities (ROW, public funds facilities)2. Debt-  Government  Access to better  Public funds are placed atguarantee model guarantees debt, financial terms of debt risk secured by private party3. Public service  Private player deploys  Risk is assumed by  Subsidy is needed to attractdelegation FTTH network with or outside player the concession holder without partial public  Lack of commitment of subsidy project sponsor might result  Player has a in service failure concession to resell the passive or active layers to service providers Source: IDATE and TAS LLC 15 Study conducted on behalf of FTTH Council Europe
  16. 16. Pros and Cons of Incumbent Financing Models Model Description Advantages Disadvantages1. Incumbent funded  FTTH financing follows  Flexibility to manage  Competitive retaliation couldmodel classical CAPEX rules of deployment according to potentially affect rate of return carrier, subject to stand-alone internal by forcing price reductions conventional stand-alone processes  Regulatory risk driven by capital planning rules and wholesale access obligations processes2. Competitive  Partnering between  Complementarity of  Need for regulatorypartnering model I incumbent and construction, capabilities endorsement(joint venture) or real estate company  Market risk mitigated by  Obligation to provide open competitive co-optation access  Ability to ring fence credit facilities, which lowers investment risk and provides capital flexibility3. Competitive  Incumbent assumes  Market risk mitigated by  Regulatory risk prompted bypartnering model II deployment responsibility competitive co-optation alternative carriers(Multi-fibre model)  Costs are shared with  Potential limited positive competitors purchasing response on the part of access to fibre pairs envisioned 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 Source: IDATE and TAS LLC 16 Study conducted on behalf of FTTH Council Europe
  17. 17. Operator funded combined with public policy stimuli  Under this approach, national governments decide to intervene, through grants or low interest loans, directly in the deployment and management of a national FTTH network.  In this case the Government is acting more as a lever by dedicating a special fund to help financing neutral open access model, most of the time being at a regional or municipality level.  Under this model, the operator assumes primary funding responsibility but is influenced by several initiatives aimed at improving a potentially unattractive business case (e.g. demand aggregation, reduced property taxes, grants to cover capital expenditures, etc.). 17 Study conducted on behalf of FTTH Council Europe
  18. 18. Most Appropriate Financing Models Geographic Mix Urban Sub-urban Rural Municipal/Regio • Municipality as an Public/private nal investor credit financing Public Private Public service Partnerships delegationFinancingStrategies Operator-funded • Incumbent funded Cost sharing • Joint venture model • Multi-fibre Operator-funded • Public funding program and public policy stimuli Source: IDATE and TAS LLC 18 Study conducted on behalf of FTTH Council Europe
  19. 19. Consider Pooled Financing 19
  20. 20. Consider Pooled Financing Approaches for small FTTH Projects ► Pooled facility to finance multiple small projects, with several lenders taking their pro rata exposure to each of the projects ► Target size of each facility: US$ 20 million, sufficient to handle 5-6 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 would provide credit enhancements, such as loan guarantees equal to 50% of the total amount ► The pooled facility will be ring fenced ► Projects could apply, through the pooled facility, to receive output-based aid from public funds ► Each project will be structured using a project finance approach ► Project sponsors will develop the FTTH projects with technical and operational assistance provided by government entities 20 Study conducted on behalf of FTTH Council Europe
  21. 21. Structure of Pooled Financing Facility Pooled Facility Long-Term Manager (e.g. EIB) LoanPublic Funds Pooled Financing •Credit Output- based Aid if Facility Debt service Enhancement needed payments Banks and Debt service Funding for Pension Funds repayments FTTH projects •FTTH project •FTTH project •FTTH project Technical Central •FTTH project Assistance FTTH project Government User fees FTTH services •FTTH project •FTTH project •FTTH project •FTTH project FTTH subscribers Source: IDATE and TAS LLC 21 Study conducted on behalf of FTTH Council Europe
  22. 22. Practices Mitigating FTTH Financial Risk 22
  23. 23. Variables Explaining Success or Failure Project Success Project Failure Demand aggregation across neighboring  Limited support obtained to negotiate areas in order to achieve critical mass financial terms with lender syndicate Sharing of deployment costs by  Since project was treated as an competitors 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 viability the incumbent of original business plan Financing of FTTH from capex  Over-optimism in assessment of customer acquisition Careful development of business plan  Competitive retaliation of the incumbent (demand assessment, technology could raise the issue that indiscriminate decisions, commercial strategy, capital public intervention could pre-empt market plan, etc.) forces Open access business model utilized to  Lack of initial commitment of project rapidly gain critical mass of demand sponsor Due diligence of credit facility conducted by an outside party on behalf of lenders 23 Study conducted on behalf of FTTH Council Europe
  24. 24. Recommendations► Careful development of business plan► Careful assessment of project risks► Demand aggregation to achieve critical mass► Search for agreements to share deployment costs► Secure a third party in search and negotiation of appropriate funding► Local governments should avoid the “Build it and they will come” syndrome 24 Study conducted on behalf of FTTH Council Europe
  25. 25. Thank you!Roland MONTAGNEIDATEDirector Telecoms Business 6 80 85 04 80 25