Typically, tower companies seek financing to enable the purchase of tower assets from operators and to fund refurbishment of towers and ongoing build-tosuit and development obligations. Whilst the “major” tower companies, such as American Tower and SBA Communications, are often funded from equity or by corporate debt facilities, junior tower companies, on the other hand, are often forced to obtain more structured financing.
Financiers of such structured debt will likely require a comprehensive security package and a parent company guarantee. The form of this security package will likely be a significant consideration for lenders, depending on the size of the tower company, its operating history and other credit factors. Lenders to smaller tower companies, or where the financing is structured on an off-balance sheet basis, will typically require security over the shares in the tower company together with security over the tower companies assets including licences and permits, tenancy arrangements, the towers themselves and sometimes the land on which they are situated. Security costs and perfection times can vary from country to country, but an understanding of these is very important from the perspective of any time and cost planning for a transaction.
The financing documentation for a towerco acquisition and development financing will typically include a comprehensive covenants package. Financial covenants will include leverage and debt service coverage testing. Lenders will also require covenants as to information in relation to and compliance with the terms of key transaction documents, together with security over these documents. Such key documents will include:
- Tower acquisition deals may be structured as either an asset purchase or a share purchase (where the operator has hived down its towers into an intra-group tower vehicle). The acquisition documentation will include provisions in relation to the transfer of the tower assets to the tower company. This is often done by way of a staggered completion to account for the administratively burdensome task of transferring what is often a large number of towers and to overcome issues of non-compliance with transfer conditions for certain problem sites. However, typically the tower company (and correspondingly their financiers) will require a majority of the total number of towers to be available for transfer before the transaction will be economically viable.
Master Lease Agreement
- This is the key lease, service and revenue agreement between the tower company and the anchor operator tenant. The MLA will detail service level requirements and payment arrangements, and (unless the operator requires an exclusive arrangement in relation to key sites) arrangements protecting the tower companies’ co-location model. Force majeure implications, security and safety arrangements are also key, particularly in emerging market jurisdictions. Termination and default arrangements, including exit rights, buy backs and step in arrangements are complicated and subject to much debate between the parties. Pricing regimes can be complex, including significant granularity in relation to components such as power costs, escalation provisions, active sharing, equipment replacement and anchor tenant discounts.
Build-to- Suit Agreements (if applicable)
- Build-to-Suit Agreements (if applicable) – as mentioned above, a tower company may offer a “build to suit” service, by which it constructs new towers for an operator, based on the operator’s specifications. The operator will then be anchor tenant on these sites. The provisions governing this programme will be detailed in built-to-suit agreements.
Given the potential social and economic benefits of the development of telecoms infrastructure to developing nations, there is a strong history of DFIs providing debt (and equity) to tower companies, both on a bilateral level and as part of combined financing structures. Commercial banks and DFIs will largely lend on similar terms within the same structured finance structure, albeit with certain variations in focus. In particular DFIs are sensitive to environmental and social risks and also sanctions and corrupt practices and will insist upon the inclusion of a strict covenant package in this regard.
For those mid-tier tower companies with a more established operating history, a bond issuance at parent company may be attractive. A bond financing would typically allow the tower company to operate more flexibly without many of the restrictions of a structured opco loan financing, and may also be more economically attractive in the longer term. However, loans are more adjustable to the needs of a developing tower company, whether by providing local currency and dollar financing and an ability to utilise the facilities over time as financing needs arise, as well as being more easily adaptable if the lenders are willing to accommodate change, based on the closer relationship between lenders and their borrower. As tower companies diversify and develop their portfolios, and acquire a good operating record, the bond market will become more available to them.