Nec, Qualcomm Offer Project Debt To Bag Deals

Fresh ground has been broken in telecom financing with equipment manufacturers falling over themselves to offer project debt to basic telecom licensees in a desperate bid to clinch deals.

Two MNC vendors Japan-ese major Nippon Engineering Corp (NEC) and California (US)-based Qualcomm are concluding deals under which they will directly participate in telecom projects.

NEC is extending project debt of about $100 million (Rs 380 crore) over and above the suppliers credit of $400-450 million (Rs 1,520-1,710 crore) to finance telecom equipment sales to Hughes Ispat Ltd (HIL), the Maharashtra basic telecom licensee.

Qualcomm is reportedly offering a $60 million (Rs 228 crore) project loan to Essar Commvision, the basic telecom licensee in Punjab. As per ongoing negotiations, the vendor is to inject $15 million (Rs 57 crore) as equity. The US telecom supplier hopes to clinch an equipment contract, estimated at about $100-120 million (Rs 380-456 crore), with Essar.

 

When signed, the HIL-NEC deal will be the countrys first telecom contract in which the equipment vendor will arrange project finance. Normally, such deals only entail a 100 per cent suppliers credit covering the cost of equipment. This, sources said, was being done as telecom equipment suppliers are keen to clinch contracts and are throwing in a host of sops to the buyer.

The $100 million being extended by NEC to HIL and the $60 million by Qualcomm to Essar Commvision will be in the form of subordinated or secondary debt. Subordinated debt paper is considered more risky as in case of liquidation it carries the last charge on assets.

According to sources, both the deals are being backed by guarantees being provided by the promoters. HIL is a 51:49 joint venture between the Mittals (promoters of steel-maker Nippon Denro Ispat) and Hughes Electronics. Essar Commvision is promoted by the Essar group and Bell Atlantic.

The active participation of vendors in arranging finances for the projects is expected to help in sourcing debt funds for the projects. The (subordinated) debt will enhance the credit proposals of the projects. The fact that an equipment vendor is willing to sink money into the project will boost the confidence of lenders, a telecom CFO said.

An NEC official, when contacted, refused to confirm the amount of subordinated debt being extended to HIL, saying that the deal is still being worked out. Sources said the lead in structuring finances for the (HIL) project was being taken by Hughes Electronics. The deal does not involve equipment supply to the companys basic telecom project in Karnataka, where HIL holds a letter of intent.

Under the terms of the three-year contract with HIL expected to be sealed next month NEC will supply switches (or exchanges) with a capacity of 300,000 lines and transmission equipment. The deal does not cover the supply of local access (connecting exchanges to subscriber premises) equipment. HIL is implementing a wireless in local loop (WiLL) architecture in Maharashtra. It plans to deploy proprietary E-TDMA (enhanced time division multiple access)-based WiLL systems of Hughes Electronics.

The HIL-NEC deal follows Alcatel backing out from the equipment supply deal. In February last year, the French telecom major was close to concluding a deal with HIL. The deal then was to include an equity sweetener. Alcatel was reported to be in negotiations with top HIL executives for a nine per cent stake in the company.

HILs three-year equity is pegged at $180 million (Rs 684 crore). The Maharashtra project is expected to cost about Rs 5,400 crore over three years, sources said. The Maharashtra basic telecom project will be among the most expensive in the country with the company having committed to pay Rs 13,909 crore to the government in licence fees over 15 years.