Banks used to find telecommunications companies in emerging markets a safe bet for corporate debt. There were good reasons for that: positive credit ratings, strong cash flows, and huge growth opportunities. Those conditions have changed. Several banks are now engaged in debt renegotiations:
- Bank of Brazil, Itau Bank and Caixa Econômica Federal are preparing to extend longer-term debt repayments to bankruptcy-protected telco Oi for approximately $3 bn in loans;
- Etisalat Nigeria is in default of payments on loans totaling $1.2 bn to thirteen Nigerian banks, including Zenith Bank, GTBank, First Bank, UBA, Fidelity Bank, Access Bank, Ecobank, FCMB, Stanbic IBTC Bank and Union Bank;
- Saudi Telecommunications Co. (STC) is in default of payments on a $4.75 bn loan related to its Turkey Telecom stake from a consortium of banks including Turkish lenders Akbank and Garanti Bankasi;
- Local Indian banks, including State Bank of India (SBI), are worried loans to Reliance Communications (RCOM) could become non-performing.
Many other smaller debt renegotiations are quietly taking place, avoiding debt restructuring and financial provisions.
There are two main causes of these troubles, changing macroeconomics in emerging markets and telecoms economic and regulatory challenges. The post-2008 financial crisis environment has a lot to do with it. For example, the end of the commodity boom led Brazil and Nigeria to recessions and sharp currency devaluations. In Turkey, the impact of an economic slowdown in Europe and ongoing domestic political turmoil resulted in tougher financial conditions. But macroeconomics explains only so much. India is facing the impact of a powerful new entrant, Reliance Jio, which offered free services to subscribers from its launch in September 2016 and then during 2017 three months free followed by a greatly discounted service. This had the effect of cutting total mobile industry revenues by 25% since the beginning of the year, precipitating mergers and causing great turmoil. Most telecommunications markets are now mature (with unique subscriber penetration above 50%) and highly competitive (with four to five players or even more).
One of the main challenges as telecommunications networks moved to broadband has been the replication and embellishment of operators’ traditional services such as voice and messaging by Internet companies offering them at no charge. WhatsApp, Skype, Facebook Messenger, Google’s Hangout and others leverage broadband connectivity to offer free communications services. For operators, the higher data traffic is not matched by higher revenues. Operators have also been slow to become digital companies in terms of both their internal processes and service offers. They lag in data analytics and data monetization, which is the strength of Internet companies.
Finally, the industry is overregulated. Governments take more than their fair share of the sector’s revenues. They design auctions to produce high spectrum prices. They tax telecommunications services as luxury goods, up to 50% of total sector revenues in several countries.
What can be done? Operators must accelerate their digitalization and think digitally. Governments must face tough political decisions to reduce sector overregulation: moderate spectrum prices, stop fining operators into bankruptcy as happened to Oi in Brazil, and reduce federal and provincial taxes on connectivity. Those are difficult decisions in politics and administration.
All things being equal, though, banks must prepare for painful debt restructuring negotiations with the most vulnerable telecom operators in each market, particularly those under the highest financial pressures in fourth or fifth place in their countries.
Thanks, Ricardo. Well-put as usual.
I would also add my opinion that much of this weakness emanates from ineffective board governance and antiquated shareholding structures (group – OpCo). These fundamental inefficiencies create sub-optimal incentive structures which focus the energy of executive management on maximizing short-term earnings and KPIs above all else.