Cellular Firms Opt For High-Cost Bridge Loans

At least four cellular companies Escotel, BPL-US West, RPG Cellular and Koshika Telecom have contracted bridge loans. Other cellular companies like JT Mobile are in advanced stages of negotiating bridge loans.

Some are seeking short-term loans to meet customs duty payment on imported equipment, banking circles said.

The bridge loans are being provided with recourse to the promoters themselves and not to the cellular companies. This indicates the low confidence among banks for cellular projects and the extent of personal risks being taken by desperate promoters.

The strategy being followed by cellular companies involves tapping all available resources in the initial project stage to meet the capital expenditure, in the absence of term loans from financial institutions.

 

The bridge loans will be repaid as and when the term loans are available.

Cellular companies are working on alternative strategies in case financial institutions stop extending term loans. Among the conditions being put forth by the institutions are assignability of licences and 1:1 debt-equity ratio. Even if the conditions are met, they are not likely to meet the funding requirement of all cellular companies.

Escotel has contracted short-term loans from Standard Chartered, Bank of America and Banque Indosuez. It is setting up networks in Uttar Pradesh (West), Kerala and Haryana. BPL-US West, which is putting up networks in Maharashtra, Tamil Nadu and Kerala, has tapped loans from Deutsche Bank and Banque Indosuez, sources said.

AT&T-Birla and Hexacom are, however, awaiting term loan sanctions from FIs instead of rushing into alternative arrangements at this stage. AT&T-Birla, which is handling the Gujarat and Maharashtra circles expects to shortly conclude a loan agreement with IDBI.

Hexacom, which is putting up networks in Rajasthan and the North-East is close to signing a deal with the ICICI, sources said.

Most cellular companies have either tied up or are in the process of finalising deals for suppliers credit on imported equipment. Though the cost of equipment works out to 55-65 per cent of total project cost, the companies are restricted by the 35 per cent cap on external commercial borrowings.

In case a company fails to access term loans from either banks or FIs, it can meet 50 per cent of the cost through promoters contribution to equity, 35 per cent by way of suppliers credit and the remaining 15 per cent in the form of bridge loans.

This is, of course, an extremely risky strategy because it leaves out no margin for meeting working capital requirement, paying the next tranche of licence fees, incidental and accidental expenses.

Since the equipment is pledged to the supplier offering suppliers credit, it will not be available for obtaining working capital loans from banks. Working capital loans can be available on the strength of equipment and other assets only if a part of it pledged for the purpose of suppliers credit, a foreign bank source said.