In November 2000, when the Financial Times proclaimed that third generation mobile telephony (3G) wouldn’t be the money-spinner that everyone thought, the news was seized on and reported again and again around the world.
The FT report was based on meetings with Keiichi Enoki, the head of the i-mode division at NTT DoCoMo, Japan’s mobile phone giant. A bit of a maverick and well known for his outspokenness, Enoki’s views on 3G were all the more interesting because earlier that year DoCoMo had bought 20 percent of Hutchison 3G UK (H3G), the winner of the 3G license in the UK reserved for new entrants. The reaction of the IR team at DoCoMo is not recorded, but in London Enoki-san’s comments were met with an air of resignation by the team at H3G, which was in the early stages of syndicating more than £3 bn ($4.3 bn*) in financing.
The comments could hardly have come at a worse time. H3G’s license had been awarded in May 2000, just as the Nasdaq Stock Market was crashing, stripping away investor appetite for technology investment. The price had been nearly £4.4 bn ($6.3 bn), admittedly 22-37 percent cheaper per MHz than incumbents, but still a significant sum of money.
H3G’s parent, Hutchison Whampoa, a substantial Hong Kong-based conglomerate, Hang Seng constituent and creator of the Orange brand, had paid the license fee in cash and subsequently recouped some of the cost by selling DoCoMo its 20 percent stake, and KPN Mobile, the Dutch mobile telecoms company, a 15 percent stake for a total of £2.1 bn ($3 bn). However Hutchison 3G UK Limited, a private company with three powerful listed parents, needed further funds to develop the technology and infrastructure in time for a planned 2002 launch.
As the largest shareholder, Hutchison Whampoa’s management tasked the team at H3G with raising the funds – not from the equity markets, but in the form of a massive syndicated loan. Furthermore, none of the three parent companies were planning to guarantee the money. In other words, it was to be a ‘non-recourse’ loan. H3G had no assets other than the license – no customers, no cash flow and barely any employees. In addition the technology was untried and the market bears were doubting whether anyone would even want to buy 3G telephones when they did become available. It didn’t look at first sight like the kind of company that anyone would lend £3,000 to, let alone £3,000 mn.
Then, in September 2000, the FT headlines screamed ‘3G doesn’t work.’ This became a recurring theme in the press as one by one the auctions for 3G licenses across Europe began to falter. The last really big prices paid were in Germany, where MobilCom struggled to raise the necessary money.
Yet against this less than supportive backdrop, H3G’s financing was completed in March 2001. The net proceeds were £3.24 bn ($4.63 bn*) in the form of a three-year (plus one-year extension) non-recourse facility, including £777 mn ($1.1 bn*) of vendor financing from Nokia, NEC and Siemens. At the time it was the largest non-recourse syndicated loan ever arranged in the UK. How did H3G manage to pull it off?
This is a tale of hard work, thoughtful planning, and – probably most crucially – a realization that a first rate communications program was essential. Rather like the concept of design in product development, communications is often talked about but rarely seen as deal-critical. The story of how H3G obtained its loan is an example of best practice debt investor relations, a useful reminder at a time when the shallow equity capital markets are forcing more and more companies to turn to debt issuance to fund their growth.
So what are the lessons to be learned from H3G and even from Hutchison Whampoa itself?
Start early
In the spring of 2000, with the technology markets crashing around his ears, Frank Sixt, Hutchison Whampoa’s CFO, flew to London and visited a group of key relationship banks. He was accompanied by Hutchison’s man on the ground, Richard Woodward, a corporate finance specialist who had been seconded from Hutchison Whampoa in Hong Kong to mastermind the H3G financing.
Admittedly, doors were open to the two men. As a strong, highly diversified conglomerate with years of banking relationships behind it, Hutchison Whampoa was known and could count on calls being returned. After the first round of one-on-one meetings with the banks, the pair immediately embarked on a second round, as much to gather feedback as to repeat their business and banking case.
‘Raising non-recourse debt is not about selling a vision; it’s about successfully communicating the sense and soundness of your business plan,’ says Richard Woodward, senior manager, finance, at Hutchison Whampoa. ‘This means spending enough time with your bankers to ensure they understand you, your assumptions and how to sensibly quantify the risks. Unlike raising equity, the communications piece is a marathon, not a sprint.’
Identify and communicate the key messages
Hutchison Whampoa Limited, as the major shareholder, knew that the key messages had to be twofold: First, its track record in establishing and adding value to telephone networks, and second, and no less important, its highly diversified financial strength.
Even though this was to be a non-recourse loan, neither HWL nor the banks were under any illusion that the chances of the parent company walking away from its obligation and then doing a similar deal in the future would be anything other than slim. Two of the key messages about HWL had to be, one, it has done this before (with Orange) and can do it again, and, two, a relatively small proportion of HWL is telecoms; most of the company is cash generative ‘old economy’ businesses such as container shipping, which gives it sound financial foundations.
‘Hutchison Whampoa is fortunate in having a strong track record of creating value coupled with a financially diversified background. If required, it can support from internal funds the large capital intensive investments needed to create that value. This provides enormous credibility to both its investment and its commitment,’ says Mark Nickell, a banker at HSBC, one of H3G’s lead underwriters.
Yet even when the credentials of the parent company had been established, lenders still had some major concerns.
Anticipate concerns and don’t skimp on addressing them
Potential lenders wanted to know: Does the technology really work? And will anyone buy the 3G service when it becomes available? H3G put considerable time and resources into building confidence in its business plan with a technical study of 3G technology, its state of development and the likelihood of it succeeding, the results of an already extensive piece of market research which tested consumer appetite for 3G, and an early demonstration of 3G-type service offerings.
In fact, the amount of management time and effort devoted to the H3G fundraising, as well as these reports, represented a considerable investment by the fledgling company, but they were to prove their worth many times over.
‘The key to coming through due diligence successfully is to work closely with the banks and consultants. It’s not just about conveying your confidence but proving it, and that means a lot of work and effort, not just from the CEO and senior managers but from everyone in the organization,’ Nickell comments. ‘Where H3G succeeded was in understanding that no plan is perfect and ensuring that throughout the due diligence period it worked to help address any potential issues.’
Understand who makes the risk decisions
Similarities with equity financing exist at every stage of debt issuance. Just as an equity deal has to be approved by an underwriting committee, so a syndicated loan has to run the gauntlet of the credit committee process. The rigor of this process cannot be underestimated, and it is different in every bank. H3G accepted every invitation it received to present to credit committees. Every day such groups assess risk across a whole range of industry sectors and the company knew that education was critical to getting the story across.
Don’t be afraid to think out of the box
As H3G worked to finalize its syndication strategy in October 2000, the deal was still one lead manager short of the intended group. With momentum crucially important, Hutchison Whampoa made a decision that was as valid commercially as it was for the key messaging to the market. It stepped into the breach, joining the syndicate and lending money to its subsidiary at the same rate as the rest of the group of banks.
However, the important message to the market was in the seniority of the Hutchison Whampoa portion of the debt in that it was lending at a subordinate level to the banks. In other words, the banks would be paid out before the parent in the case of default. Again, the communication aspects of the decision were recognized by the Hutchison Whampoa and the H3G teams to be as important as the practical issue of getting the deal completed.
‘Keeping momentum in the deal was important, especially with the negative sentiment towards the telecom sector growing,’ recounts Frank Sixt, CFO of Hutchison Whampoa. ‘When we realized that a couple of potential lead arrangers were slowing down the process by being unable to commit, we decided to step in quickly to show our support for the seven lead arrangers as well as for the transaction. Sure, we had an underwriting commitment, but getting a deal away successfully is about teamwork.’
Never assume the lead arrangers are doing all the work
Of course many companies have financed their growth with syndicated loans. In most cases, the bank acting as the lead arranger discusses the project with the company then goes away and handles the whole process. There are two stages: obtaining credit committee approval, then marketing to the next tier of banks which the deal will be sold onto.
While working with their lead arrangers and acknowledging the hard work they put into the deal, HWL and H3G made sure they kept the message rolling out to large numbers of banks that might participate at the secondary stage. Hong Kong was a particular focus, with Woodward in particular wearing out the shoe leather as he visited bank after bank to explain the details of the H3G story and related issues such as refinancing risks.
Unexpected developments lay around every corner. For instance, having invested considerable time over the months with three different Japanese banks, H3G had its hopes of securing sizable participation from each of them dashed when they merged. Three participants thus became one, and H3G had to fill the other two slots.
‘Large and complex financings of this type must be viewed as a team effort,’ HSBC’s Nickell remarks. ‘The lead arrangers committed both their balance sheets and their market reputations to the financing, but without the on-the-ground support and high visibility of senior management of H3G and HWL to reinforce the obvious financial commitment, bank confidence would have undoubtedly suffered given the broader market context.’
Don’t try and fight too many battles at once
Throughout the months that the H3G deal was being assembled, newspapers were preaching gloom and doom for 3G technology with the sell side and buy side riding the same wagon. Even the mobile phone trade press voiced concerns, with the general consensus that companies had massively overpaid for 3G licenses. How did a small company like H3G, with its limited resources, tackle all these opinion-makers when there was so much misinformation and disinformation in the marketplace? The answer is that they didn’t. The team took an active decision to focus exclusively on the audience that mattered – the banks that could make or break the syndicated loan.
‘It was obvious from early on that we would have to win the minds of bankers over the background noise of the press, which was determined to kill the 3G story,’ Woodward says. ‘The way to do this was not by competing in the uncontrollable PR space but by communicating the facts, issues and risks properly through the due diligence process. Luckily, credit committees read due diligence reports as well as the front page of the broadsheets, but it was a depressing time. Armed with the facts, the lead arrangers were also very resilient under the barrage of negativity.’
It’s not over even when the fat lady sings
The final lesson to be learned from the H3G story is that debt IR doesn’t end when the money is in the bank. Just as shareholders and bondholders need continuous communication, banks require the same professional level and frequency of communication. For example, H3G holds highly professional annual meetings for all their lenders. They’re a little like annual shareholders’ meetings in that they explain the company’s performance as measured against previously set targets.
Encore!
Riding on its success with H3G, Hutchison Whampoa repeated the exercise with a E4.2 bn ($4.7 bn) bank and vendor finance facility for its Italian 3G operations in January 2002. The deal adds still more credibility to Hutchison’s global 3G story with an even wider group of banks, including many of the UK banks that backed H3G. The moral of this story? Good debt IR is every bit as important for the future funding of companies as equity IR.
