Open Fiber financing rolls out
The roll-out of Open Fiber’s Italian ultra-broadband network has taken off thanks to a landmark €3.5bn financing. By Ottaviano Sanseverino, partner and head of the Energy and Infrastructure department and Arrigo Arrigoni, managing associate, at Gianni Origoni Grippo Cappelli & Partners.
Open Fiber’s financing, which was signed on August 3 2018 and achieved closing in October 2018, represents the largest structured finance transaction closed in EMEA for the financing of a fibre-optic ultra-broadband network.
Participating lenders in the transaction included some of the most relevant institutional and commercial banks in the Italian and European finance landscape, ie the European Investment Bank, Cassa depositi e prestiti, BNP Paribas, Société Générale, UniCredit, Banca IMI, Banco BPM, Crédit Agricole CIB, Banco Santander, MUFG Bank, ING Bank, MPS Capital Services Banca per le Imprese, National Westminster Bank, UBI Banca and CaixaBank.
The financing will support the development by Open Fiber of its ambitious business plan to set up the largest FTTH ultra-broadband network in Italy and in Europe.
In recent years, the Italian market has been craving initiatives in the ultra-broadband infrastructure sector, due to the limited development of high-speed full fibre-optic networks in Italy and the consequent significant lagging of Italy behind its European peers in terms of fibre penetration rate.
In this context, Open Fiber is planning to roll out Italy’s largest fibre-optic ultra-broadband network, entirely based on the fibre to the home (FTTH) technology, the fastest and cutting-edge technology available to-date in the market. In particular, FTTH technology is able to deliver steady speeds up to 1Gbps, while fibre to the cabinet (FTTC) technology is able to deliver speeds of 100+Mbp only for houses closest to cabinets.
The shareholders of Open Fiber are Enel SpA (Enel) and Italian state-owned financial institution Cassa depositi e prestiti SpA, through CDP Equity S.p.A. (CDP Equity), each owning a 50% equity stake in Open Fiber.
Open Fiber’s ambitious business plan envisages the enabling (so called passing) of ultra-broadband to approximately 19m households in Italy, spread almost evenly among:
* Commercially viable areas – so called A and B Clusters – with approximately 9.5m households expected to be enabled; and
* Market failure areas – so called C and D Clusters – with approximately 9.3m households expected to be enabled.
Open Fiber’s business is based on a so-called wholesale only model, ie Open Fiber develops its own network and acts as a pure wholesale player, providing both active and passive services directly to telecom retail operators – eg Vodafone, Wind/3 and others – or pay TV providers with ambitions to become internet service providers such as Sky, without competing in the retail segment.
In addition, in C and D Clusters Open Fiber operates under a concession regime benefiting from public grants for construction, made available in the context of the Italian Government’s strategy to comply with the targets and goals set out in the “Digital Agenda for Europe for 2020”.
To achieve its goals, Open Fiber has put in place an intensive investment programme for the next few years in both A and B Clusters and C and D Clusters, while managing its already existing and operating network, ie the network formerly owned by Metroweb, which was merged into Open Fiber in 2016.
The aggregate capex under the investment plan is approximately €6.5bn, of which about €950m will be covered through additional equity from the shareholders. As a consequence, Open Fiber needed a financing that, combined with shareholders’ support, grants received from Infratel and its own cashflows, could ensure the full funding of such an investment programme.
The transaction posed a number of challenges, deriving in particular from:
* Open Fiber’s revenue structure – Unlike the other asset classes typically financed through PF schemes in Italy, Open Fiber’s revenues are exposed to market/demand risks, thus posing significant challenges in identifying a structure suitable for financing on a limited recourse basis;
* The expected exponential increase of Open Fiber’s size – Open Fiber’s ambitious plan would lead to an exponential increase in Open Fiber’s size and market share, thus requiring a dedicated covenants structure capable of adapting to the changing shape of Open Fiber;
* The absence of a standard project finance contractual structure – Typical PF structures embed a stable and pre-set framework for project contracts, with full externalisation of construction risks. Open Fiber’s contractual framework, instead, due to the size of its project, and the business need of Open Fiber to mitigate through fragmentation counterparties’ risk, was characterised by a complex and fragmented contractual structure, subject to on-going changes;
* The need for flexibility - Open Fiber, considering the need to develop a huge and highly fragmented investment plan, while providing – at the same time – services in respect of the already operational network, required a degree of flexibility significantly higher than the one typically allowed in PF structures.
The difficulty of reconciling the needs and nature of Open Fiber with the standard lenders’ requirements in a PF infrastructure deal – eg stable and regulated revenues framework, pre-set and tested project contracts’ structure and standard set of PF covenants – was evident and significant from the outset.
In addition, other elements rendered the transaction even more challenging, such as:
* Timing, which for a project such as Open Fiber’s was of the essence due to the tight time schedule set out under the concessions in C and D Clusters and the market competition to which Open Fiber was exposed particularly from the incumbent player, Telecom Italia; and
* Debt size, which required significant syndication efforts in order to build up a pool of financiers capable of making available the required debt capacity in such a tight time-frame.
The only way to overcome all such challenges was to design a transaction structure that:
i) Suited Open Fiber’s nature and needs;
ii) Preserved and safeguarded to the maximum extent possible the lenders’ interests, thus ensuring competitive pricing; and
iii) Was simple enough to allow a swift syndication and execution of the deal.
Highlights of the contractual set-up
The result of the structuring effort is a landmark transaction, which combines the features of corporate financings and project financings in a framework that is efficient for the borrower but still lender-protective, with a view to overcoming the above mentioned challenges. Below are a few highlights of the designed framework’s features:
* Close eye on commercial contracts to monitor revenues – In order to mitigate the demand/revenue risk, a thorough analysis was made in respect of Open Fiber’s commercial contracts, and dedicated protections have been included in the financing documents to ensure that, on one side, Open Fiber is able to manage with a certain degree of flexibility its commercial relationships while, on the other side, deviations from the current contractual set-up that may lead to a prospective fall-off in aggregate revenues can be monitored and tackled by lenders in due course;
* Financial covenants structure – The current booming phase of Open Fiber’s business is expected to result in an exponential increase in Open Fiber’s figures in a limited period of time. Furthermore, the funding of Open Fiber’s business plan results from the combination of equity, public grants, debt and use of operating cashflows.
The standard PF approach on financial covenants would not have fitted such a scenario. The financial covenants structure was therefore tailored to the project combining corporate financings covenants - such as interest coverage ratios and net debt/Ebitda ratios – with more typical PF covenants – such as a loan life coverage ratio to monitor refinancing risk – with appropriate adjustments – including limited pre-set covenant holiday periods - to take into account the continuously changing shape of Open Fiber;
* Project contracts structure – The development by Open Fiber of its business plan relies on a quite complex and fragmented contractual framework, which did not fit the standard structure for project contracts in PF. The financing documents have therefore been tailored to such contractual structure, replacing the typical reserved discretions structure with a more sophisticated structure that:
i) From Open Fiber’s perspective, allows flexibility in managing the various contractual relationships, to the extent that its business plan and financials remain overall substantially unaffected, adopting therefore an approach that is nearer to a corporate structure rather than construction PF structures; and
ii) From the lenders’ perspective, provides comfort that any contractual matter that could have a substantial impact on Open Fiber’s business plan and financials is captured and made subject to the usual level of lenders’ control for a PF transaction;
* Structural flexibilities but on an ad-hoc basis – As expected, Open Fiber’s business model required flexibilities that are not common in infrastructure PF financings in Italy. This flexibility has not been allowed, however, following a pure corporate approach, but rather accurately focusing on few key elements, such as, in addition to the above mentioned contractual aspects:
i) The inclusion in the financing of a corporate-style guarantee facility, which has required significant structuring efforts since – in order to meet Open Fiber’s operating needs – it allows the issuance of guarantees of significantly different natures and tenors – including, among others, short-term construction guarantees, on-going commercial guarantees to support the business and long-term performance bonds under the concessions with a maturity exceeding the maturity of the financing – with issue mechanics that allow particularly fast and frequent issue processes;
ii) A particular set-up for the financing’s availability period and repayment profile. In fact, repayment of the construction term facilities is bullet at maturity subject to minimal potential cash-sweep mechanisms, with an availability period almost matching the maturity of the financing.
Absence of any amortisation is non-standard for a PF construction loan in Italy, since these financings typically include an amortisation period. This particular aspect has been mitigated through a robust structure for monitoring and mitigating refinancing risk, including dedicated financial covenants and structures that incentivise the timely activation of the refinancing process.
Mixing elements from two different worlds – corporate and PF financings – and harmonising them taking into account Open Fiber’s business peculiarities was, in a nutshell, the formula for structuring a transaction that could best suit all parties’ needs.
Here are a few takeaways from this transaction:
* Italian, traditional and soft, infrastructure remains an attractive target for European and global lenders and investors, as confirmed by the significant oversubscription that was achieved when syndicating this financing in the market;
* For large construction financings requiring complex and well-tailored structures, ad-hoc and flexible facilities, eg a guarantee facility, and a smooth and fast execution phase, bank loans still have some advantages compared with DCM transactions – all the more so these days since banks seem able to compete also in terms of pricing with DCM investors, particularly for mid-term financings;
* MLAs and sponsors involved in this transaction have proven that thinking out of the box, understanding the deepest essence of the other parties’ actual needs and adopting solutions that may also go beyond the standard positions of lenders and borrowers in PF deals may allow the financing of projects that would not be obvious PF targets;
* The entire financing package is governed by Italian law: while this is not an obvious choice for a deal of this size, relevance and international reach, Italian law has proven to be a valid alternative – including from a syndication perspective – to English law. This is also confirmed by the fact that Open Fiber is only the latest in a series of recent large international financings closed in Italy that are governed by Italian law.