Using Project Finance to Mitigate Telecom Risk

Abstract

Despite its rapid growth, the telecom sector continues to reflect rising risk because of growing system complexity, unstable prices, tight credit, and reliance on large debt burdens for multiyear buildout of massive networks. Given the growing industry risk levels and a renewed investor interest in credit quality, Standard & Poor9s expects that sponsors will increase their use of traditional single-asset project finance structures for their long-term telecom investments. These structures help to limit recourse to the sponsors9 balance sheets, enable joint ventures, attract large amounts of debt, and provide lower levels of credit risk. Because of regulatory and technology uncertainty and the growth in competition, coupled with rising complexity and debt burdens, most telecom projects will be challenged to obtain initial ratings in the investment-grade category without financial guarantees from investment grade-rated parents, solid structural features, and robust projected cash flows.