Plenary session financing ftth networks day 1 hristo stoykov

New Products & Special Transactions | European Investment Bank

European Investment Bank

Financing of European Broadband Infrastructure

FTTH Conference 2011

H. StoykovStructured Finance & Advisory

9th of February 2011, Milan, Italy

209-02-2011 New Products & Special Transactions | European Investment Bank

European Investment BankDisclaimer

This Presentation is incomplete without reference to, and should be viewed solely in conjunction with, the oralbriefing provided by the European Investment Bank (“EIB”). The terms and conditions are intended as an outlinefor discussion purposes only and made on an indicative basis. All figures set forth in this Presentation are subjectto change, to a satisfactory due diligence and to all necessary internal approvals of EIB (in particular of its creditcommittees).

The information in this Presentation reflects the prevailing conditions and the view of EIB as of this date and areaccordingly subject to change and based on carefully selected sources believed to be reliable. EIB has notindependently verified this information and does not make any representation or will be liable that suchinformation is accurate, valid, timely and complete.

This Presentation is provided without any liability whatsoever by EIB and shall not constitute any obligation of EIBto extend credit facilities to the Company or to carry out a due diligence review of the aspects relevant for thefinancing of the Project.

Neither this presentation nor any of its contents may be duplicated, published or used for any other purposeswithout the prior written consent of EIB.



European Investment BankAgenda


Market & Policy Overview

EIB Broadband Financing

Financing Models and Concepts

Loan Process

Summary & Contact Details


European Investment BankProfile

EIB was created by the Treaty of Rome in 1958

EIB is a not-for-profit, policy driven institution

EIB is 100% owned by the 27 EU member states

EIB has subscribed capital of EUR 232.4 bn as of 2009

EIB is AAA/Aaa rated by Moody’s, S&P and Fitch with stable outlook

EIB funds itself on the capital markets: EUR 79.4 bn in 2009

EIB signed loans amounting to EUR 79.1bn in 2009 (c.93% in EU)

EIB is the majority shareholder in the European Investment Fund

For more information, please visit: www.eib.org

The European Investment Bank is the European Union‘s long-term financing institution. The Bank acts as an autonomous body set up to finance capital investments furthering European integration by promoting EU policies.

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European Investment BankAppendix: General Policy Objectives

I. Within the European UnionCohesion and convergence

Small and medium-sized enterprises (SMEs)

Environmental sustainability

Knowledge Economy

Trans-European Networks (TENs)

Sustainable, competitive and secure energy

II. Outside of the European UnionPrivate sector development

Infrastructure development

Security of energy supply

Environmental sustainability

Support for EU presence in Asia and Latin America via Foreign Direct Investment (FDI)

III. Under EU MandatesPre-accession

European Neighborhood

Development

http://www.eib.org/projects/topics/innovation/index.htm�

http://www.eib.org/projects/topics/cohesion_and_convergence/index.htm�

http://www.eib.org/projects/topics/environment/index.htm�

http://www.eib.org/projects/topics/energy/index.htm�

http://www.eib.org/projects/topics/tens/index.htm�

http://www.eib.org/projects/topics/sme/index.htm�


European Investment BankEIB/EIF investment cycle coverage

Risk Capital CIP Resources (SME) RSFF (SME / MidCap)

Entrepreneur, friends, family

Business Angels

Seed/Early Stage VC Funds

Formal VC Funds

Bank Loans and Guarantees

Seed / Start-Up Phase Emerging Growth Phase Development Phase

Facility: High Growth Innovative SME Scheme (GIF), Ecotech

Purpose: IP financing, technology transfer, seed financing, investment readiness

Target Group: VC Funds, Business Angels

EIF Product: Fund-of-Funds

Competitivness and Innovation Program (CIP) Guarantee schemes

Growth financing for SMEs

Formal VC Funds, CLOs

SME guarantees (loans, microcredit, equity/mezzanine, securitisation)

RSFF

Innovation financing

SMEs/MidCaps, Banks, PE Investors (sub-investment grade)

Loans (incl. Mezzanine), Funded Risk Sharing Facilities with Banks (Investors)

Special Operations

Investment Loans

Investment Loans

RDI financing

MidCaps/Large Corporates/Public Sector Entities (investment grade)

Guarantees

Project Financing

Later StageCounterparts

EIF EIB







Loan Process



European Investment BankMarket & EU Policy Overview: State of Broadband

Broadband household penetration 2000-2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

of h

ouse

hold

s

EU27 average USA Australia Japan Korea

Coverage of different broadband technologies

0

10

20

30

40

50

60

70

80

90

100

DSL Cable FTTH/FTTB 3G

% o

f hou

seho

lds

/ pop

ulat

ion

EU average USA Korea Japan Australia OECD Average

Source: OECD

By 2009, 55.8% of EU households subscribed to some form of broadband internetStill lagging behind US, AU, JP and KR

xDSL coverage of 94% of EU households translates into broadband gap of close to 13 million households US leads in cable coverage, JP and KR in FTTx, while EU is almost at par in 3G coverage

Source: WBIS


I. Broadband Infrastructure Development

II. Application and Diffusion of ICT Across Sectors (Digital Single Market, Digital Inclusion, eGovernment)

III. ICT R&D and ICT Applications for Low Carbon Economy

European Investment BankMarket & Policy Overview: Europe 2020 - Digital Agenda

Digital Agenda Broadband Targets

Broadband Category Access Speed Enabling Technologies

Target I: Basic Broadband for all by 2013

Basic Broadband 150 kbps – 30 Mbps Copper (ADSL2, VDSL1, SDSLS), Cable (EuroDOCSIS 1.1/2), Mobile (EDGE, 3G, HSPA), Wireless (WiMax), Satellite

Target II: High or very high speed access to all by 2020 (30 Mbps or above)

High Speed 30 Mbps – 50 Mbps Copper (VDSL2), Mobile (HSPA+, LTE)

Very High Speed 50 Mbps – 100 Mbps FTTH (GPON, PtP), Mobile (LTE advanced)

Target III: 50% or more of EU households subscribe to Internet access above 100 Mbps by 2020

Ultra High Speed 100 Mbps – 1 Gbps FTTH (NGA1, NGA2, PtP), Cable (EuroDOCSIS 3)


European Investment BankMarket & Policy Overview: Broadband Benefits

Correlation between broadband/mobile penetration and innovation in EU27

R2 = 0.4016

R2 = 0.0036

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%

Broadband/mobile Penetration

Inno

vatio

n S

core

boar

d V

alue

Broadband (Correlation 0.643) Mobile (Correlation 0.060)Linear (Broadband) Linear (Mobile)

Countries with higher broadband penetration, also perform better in innovation (see chart)

OECD estimates that building of national fiber to the home could result in savings of 0.5-1.5% in electricity, education, transport and healthcare

GSM association estimates that NGN would contribute to additional 0.5 –1.0% to the annual European GDP

Source: EIB estimates and European Innovation Scoreboard (UNU-MERIT)







Loan Process



ICT Signatures 2000-2010

RDI22%

Fixed NW7%

2G NW14%

Other6%

Fixed Broadband32%

Broadband51%

Mobile Broadband19%

Average annual lending for broadband projects for the last ten years was c.EUR 1.1bn (EUR 1.7bn for 2007-2010)

During the last financial crisis EIB increased lending to broadband projects by over 50% with signatures for 2009 of EUR 2.3bn

In 2009, loan approvals in the ICT sector reached EUR 3.9bn

Approximately 40% of these were for ICT Research, Development and Innovation

More than 50% of the approvals were for broadband projects including land, mobile and satellite

Nearly 2/3 of the approved broadband projects were fixed solutions

EIB investments to broadband infrastructures

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fixed broadband Mobile broadband

mEUR

For an updated list of projects visit: http://www.eib.org/projects/loans/sectors/telecommunications.htm

European Investment BankBroadband Financing: direct loans to broadband infrastructure 2000 – 2010


ZON Multimedia(Portugal)

EUR 100m

Project:EUR 307m (i.a. FTTH)

09-2009

Reggefiber Group B.V.(The Netherlands)

EUR 130m RSFF

Project: EUR 290m (FTTH)

10-2010

Fastweb S.p.A. (Italy)

EUR 350m

Project: EUR 850m (ADSL & FTTH)

02-2009

Iliad SA (France)

EUR 150m

Project: EUR 800m (FTTH & xDSL)

07-2009

Portugal Telecom (Portugal)

EUR 200m


07-2009

SONAECOM (Portugal)

EUR 75m


02-2010

M-Net Breitband Munchen (Germany)

EUR100m


12-2009

Türk Telekom(Turkey)

EUR 250m RSFF

Project: EUR 661m (FTTC & FTTB)

04-2010

For an updated list of projects visit: http://www.eib.org/projects/loans/sectors/telecommunications.htm

European Investment BankBroadband Financing: FTTx examples (2009 – 2010)







Loan Process



European Investment BankBroadband economics still not compelling

High Capex:Roll-out costs per country are enormous, thus incumbents willnot bear these costs alone;Altnets also need to chip in but at higher cost of funding andlimited borrowing capacity (see Top Chart);

Governments: full or partial support will be needed, butavailability of funding, pricing and austerity measuressuggest extended timetable for broadband roll-out (see LowerChart)

Regulatory uncertainty (“right of way”, wholesale access,wholesale pricing, etc.)Competition, especially from cable operators but in somecases altnets (e.g. France/Italy), could push incumbents toinvest in FTTH

but likely to concentrate of dense areas due to competitivethreats & capex efficienciesunderserved areas offer limited competitive pressures and highcapex; incumbents likely to preserve the current state

Demand: low subscription rates, unclear ARPU driversTechnology risks (incl. alternatives e.g. wireless, cable)Financial risks (Basel III, capital availability & cost offunding, corporate & sovereign credit rating actions,austerity measures, M&A)Other risks: economic, counterparty, etc.

European Telcos - 5yr CDS spreads (Jan 2007 - Jan 2011)

0

200

400

600

800

1000

1200

1400

1/1/07

1/4/07

1/7/07

1/10/0

71/1

/081/4

/081/7

/08

1/10/0

81/1

/091/4

/091/7

/09

1/10/0

91/1

/101/4

/101/7

/10

1/10/1

0

bpsSCMNVX

FRTEL

OOMLN

TELEFOA

TELNO

TLIASS

VOD

DT

KPN

NTC

PORTEL

TDC

TITIM

TKA

BRITEL

HTO

CWCLN

VMED

UPC

ERC

2007 2008 2009 2010

Source: Bloomberg

EU27(excl. LUX) 5YR CDS Spreads (bps)

0

200

400

600

800

1000

1200

01/01

/2007

01/03

/2007

01/05

/2007

01/07

/2007

01/09

/2007

01/11

/2007

01/01

/2008

01/03

/2008

01/05

/2008

01/07

/2008

01/09

/2008

01/11

/2008

01/01

/2009

01/03

/2009

01/05

/2009

01/07

/2009

01/09

/2009

01/11

/2009

01/01

/2010

01/03

/2010

01/05

/2010

01/07

/2010

01/09

/2010

01/11

/2010

01/01

/2011

UK

FR

DE

IT

NL

ES

PT

AU

SWE

DNK

BE

IRL

FI

POL

GR

CZ

HU

BG

RO

LAT

LIT

EST

MT

SL

CYP

SK

2007 2008 2009 2010

Source: Bloomberg


EIB Existing Instruments

Projects must be:

• Technically sound

• Financially viable

• In compliance with regulation

• Show acceptable economic return

European Investment BankAddressable Market Segments

Black Areas

Estimated total investments EUR 220-280bn until 2020* - on average c. 50% of the total market cap for the sector

Black areasEUR 80-90bn**

Grey + WhiteEUR130-200bn

Certain Grey Areas

White & Certain Grey AreasGovernment funding plus “New risk-sharing instruments” or modified existing ones will be needed

Source: EIB estimates* Band based on various studies and assumptions** Black areas estimates based on industry forecasts


European Investment BankFinancing Models and Concepts: What we can offer to broadband projects?

Corporates Project Finance Public Sector OtherBroadband project is definedand EIB is financing up to 50%of the eligible project costs(more information on this isprovided in the next slides) buton the balance sheet of thepromoter, i.e. the ability of thecompany as a whole to servicedebt is the main driving factorin the process along with theproposed structure of thefacility.

EIB also finances corporatesindirectly usually via third-partyfinancing institutions.

Broadband project isstructured as a ring-fencedoperation with limited or norecourse to the promoters.The quality of the assets andtheir ability to generate cashare vital for such type ofoperations.

PF operations could be full-risk, guaranteed (banks,corporates monolines,governments), secured,PPPs…

Broadband project may besupported indirectly via EIBfacilities extended to memberstate and local governments

Infrastructure funds

Advisory services

Other initiatives


European Investment BankCorporate Financing Concepts: Definition of “Eligible Project Costs”

“The Project” is an internal EIB definition ofCapex/Opex expenses typically over 3years falling within certain eligibility criteriaof the Bank. From a credit perspective, itcould be defined as a “Borrowing base” ofwhich up to 50% could be financed by EIBproceeds.

If all project costs presented by thecompany are deemed “eligible” (to beconfirmed during the due diligence meeting)and thus included in the project definition,EIB will be able to provide a facility with amaximum amount equal to the lowest of:

50% of project costs, and

the applicable risk rating limits;

The remainder of the project costs is to becovered though other financings or throughoperating cash flows

Company

EIB Loan

Eligible Costs 2010

Engineering

Management

Civil works

2011 2012

€ 10m € 5m € 3m

€ 7m € 5m € 2m

€ 60m € 50m € 15m

Total Annual € 85m € 65m € 25m

Total Project € 175m

Min EIB Loan € 7.5m

Max EIB Loan€ 87.5 m (50%)

1

2

Other € 8m € 5m € 5m

Credit risk limiteither/or


European Investment BankCorporate Financing Concepts: Example Financing Models

Bilateral Lending:EIB can participate in transactions usually through an EIB direct loan agreement. However, EIB typically prefers to co-finance with other financing partners (e.g. commercial banks, investors)In the case of co-financing EIB can provide a loan in parallel to the financing partners directly with the final beneficiary (with key contractual terms aligned) OR……can provide a guarantee to the financing partners and thereby share the credit risk and enable capital relief. The guarantee can also be complemented by EIB funding (in order to generate additional Financial Value Added)

Syndicated Lending:EIB can participate in syndicates, though some limiting factors can apply (i.e. EIB cannot extend funding to HoldCos in acquisition structures, only to OpCos; EIB still needs a side agreement that the company will execute the defined project, etc.)

Company

EIB (RSFF) Financing Partners

EIB Loan Agreement

Guarantee +/or Refinancing

FinancingAgreement(s)1

2

Senior SecuredSecond LienSenior UnsecuredJunior UnsecuredPIK loansMezzanine, etc.

Equity

Debt









Advisory services

Other initiatives


European Investment BankProject Finance: Broadband Concepts

Passive Infrastructure

Company

Network Operator

Company

Service Company

Company

Service Company

Company

End Users

Promoter A Promoter B Promoter C

equi

tyequity

Laye

r 1La

yer 2

Laye

r 3 EIB financing in such a model can be envisagedat the SPV level under certain conditions.

Quality of the assets owned by the SPV, i.e.their ability to generate cash and service debt, iscrucial.

In general, a variety of risks are assessed duringdue diligence – features of the structure, risksrelated to financing (interest rates, refinancing,liquidity, etc.), implementation/construction andmanagement, documentation, regulation, collateral,technology, credit standing of the promoters, etc.

Some form of credit enhancement may beexpected. This may take the form of, but it is notlimited to:

recourse to the promoters – e.g. creditguarantees, performance guarantees, etc.

security over assetsthird parties guarantees – acceptable

banks, corporates, governments, etc.

Layer 1 is structured as a ring-fenced operation,an SPV, owned by promoters (e.g. operators,utilities, public sector, etc.). The SPV is the ownerof the passive infrastructure which is managed byan operating company. The latter sells capacity toservice companies which develop and sellservices to the end customers.

equitydebt

debt









Advisory services

Other initiatives


European Investment BankPublic Sector Financing & Other Activities to support broadband

EIB extends credit facilities to local governments under framework agreementsEIB could collaborate with third parties such as national agencies in joint programs

Other special activities that may be relevant to broadband investments include:

RSFF Facility (under EIB window only – see Appendix)EIB equity participations in infrastructure fundsOther special operations such as JESSICA, JASPERS, JEREMIE (EIF)Advisory services such as EPEC (European PPP Expertise Center)

New Risk Sharing Schemes (2014 onwards)







Loan Process



European Investment BankLoan Process – Typical Timeline

….Month 1 Month 2 Month 3 Month 4

Initiation

A

Month 5

!

Concept Review

Due Diligence > Final Review

Contract Negotiations

Signature

Request for non-objection opinions from MS and EC

Due Diligence process involves financial, technical, economic, legal, environmental, and social aspects

Disbursement > Monitoring > Repayment

Concept review is based on preliminary information provided by the promoters.

First Approval by EIB Management Committee allows the staff to engage in an official appraisal process

For all operations EIB requests non-objection opinions from the concerned Member State(s) and the Commission

Second Approval by EIB Management Committee allows the presentation of the operation to the EIB Board of Directors (1 month in advance; 10 x p.a.)

Approval of EIB Board of Directors allows signature of the approved and negotiated structure

C

A

B

B

C

!







Loan Process



European Investment BankEIB Financing: Benefits for Promoters

Pricing advantage (EIB’s AAA rating and non-for-profit pricing)

Long maturities of up to 10 years for corporates (potentially longer for project finance)

Direct EIB financing from EUR 7.5m up to EUR 200m per transaction (for cross-over or sub-investment grade counterparts; other limits may apply in line with the internal credit policy of the Bank)

Strong technology/industry expertise

EIB does not sell assets on the secondary market (buy and hold strategy)

Relationship with co-financing partners: no cross selling of other products (just long-term lender)

Signalling Effect: EIB as a quality stamp

Diversification of funds

Note: EIB products are not grants but loan products


European Investment BankMore Information & Contact Details

Thank you for your attention!

http://www.eib.org

Hristo Stoykov

Structured Finance & Advisory

Phone: (+352) 4379 87005Fax: (+352) 4379 67292email: [email protected]

European Investment Bank98-100, boulevard Konrad AdenauerL-2950 Luxembourg


European Investment BankAppendix: Abbreviations

RSFF – Risk-Sharing Finance Facility for higher-risk promotersJASPERS – Joint Assistance to Support Projects in European Regions to prepare projects supported by EU Structural and Cohesion FundsJEREMIE – Joint European Resources for Micro-to-Medium Enterprises in the regions to encourage more business start-ups and new ventures. Managed by the EIFJESSICA – Joint European Support for Sustainable Investment in City Areas for investment in sustainable urban developmentEPEC – European PPP Expertise CenterECTF – European Clean Transport Facility (approved by Ecofin)SFF – Structured Finance Facility established by EIB in 2001 to support sub-investment grade projectsCCF – Carbon Credit Funds created in collaboration with institutions such as EBRD and World BankELENA – European Local ENergy Assistance technical assistance facility financed through the Intelligent Energy Europe programme


European Investment BankAppendix: Lending and Own Capital Figures (as of end-2009)

Lending Own Capital

FYE 2009


European Investment BankAppendix: EIB General Organizational Structure

Board of Governors27 members

Board of Directors28 Directors (18 Alternates)

+ up to 6 experts

Management CommitteePresident of the EIB+ 8 Vice-Presidents

IG SCC SG-JU RH Ops A Ops B FI PJ RM TMR

Audit Committee

OCCO

Strategy and Corporate

Centre

General Secretariat

Legal Affairs

Human Resources

Finance Directorate

ProjectsDirectorate

Risk Management Directorate

EIB GroupCompliance Office

Operationsin the EU and

Candidate Countries

Operations outside the

EU and Candidate Countries

Inspectorate General

Transaction Management and

Restructuring


European Investment BankAppendix: Risk Sharing Finance Facility (RSFF) – Set-up

Own Resources

EUR 1bn RSFF[up to EUR 10bn assuming

leverage of 5.0x ]

Direct Lending Indirect Lending / Financing

European CommissionEUR 1bn

Corporate LendingSenior SecuredSecond LienSenior UnsecuredJunior UnsecuredPIK loansMezzanine, etc.

Project FinancingUniversitiesOther: SPVs, PPPs, JTIs …

Financial Intermediaries(extend lending capacity)

Risk SharingCo-financing

Investment FundsRenewable EnergyOthers

Collaboration with EIFBanksFunds

1 2

3

4


European Investment BankLoan Process – Counterparties

Structured Finance & Advisory

Project Directorate Legal Services

Risk Management Treasury, Other …

Loan Officer: origination, structuring, financial analysis

Economist/Engineer: economic, regulatory and technical analysis

Internal/External Lawyers: legal due diligence, contract

negotiation

Credit risk management, pricing & monitoring

Funding, disbursement, EC opinions, etc.

Main relationship point Due diligence and project eligibility evaluation

Mainly contract negotiations

EIB Team

Indirectly involved:

Promoter

Plenary session financing ftth networks day 1 hristo stoykov

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