SDFAST – Accelerating French fibre rollout

PFI Yearbook 2023
11 min read

Bouygues Telecom and Vauban Infrastructure Partners through its digital investment platform Vauban Infra Fibre joined forces to accelerate the rollout of fibre-optic in France. By Charlotte de Parseval, executive director, corporate and leveraged finance, telecoms, and Kevin Douard, director, real assets distribution, Crédit Agricole CIB.

Bouygues Telecom (BYT) and Vauban’s non-recourse €1.6bn financing for SDFAST was signed in April 2022 and closed the following month, representing one of the largest sole underwritten European project finance transactions in 2022. This is the first European optical fibre transaction combining such a long maturity and large volume.

Context and rationale

BYT and Vauban Infra Fibre entered into a partnership through a dedicated joint company named Société de Développement de la Fibre Au Service des Territoires (SDFAST). SDFAST is 51% owned by Vauban Infra Fibre SAS, a digital investment platform entity controlled by the investment funds managed by Vauban, and 49% owned by BYT. The project aims at financing the deployment of fibre to the home (FTTH) networks in rural and medium dense areas of France, so-called PIN and AMII zones, currently being rolled out by various infrastructure operators such as Orange Concessions, XpFibre, Axione, TDF or Altitude.

In France, FTTH plugs in medium dense (AMII) and rural areas (PIN) are rolled out by infrastructure operators on a de facto monopoly basis and typically commercialised under wholesale agreements based either on co-investments (IRU) or rental models:

* Co-investment IRU model consists in buying long-term rights to use on a portion of the network, usually for a 20-year period. These rights of use are acquired in tranches of 5% of the plugs in a given area.

* Under passive or active rental models, the telecoms operator pays a recurrent fee per plug connected to the infrastructure operators.

Over the medium/long term, there is a financial arbitrage in favour of co-investment versus passive rental. The SDFAST business model relies on this arbitrage between IRU and rental economics. SDFAST will front the capacity to purchase access rights – irrevocable rights of usage or IRU – from FTTH infrastructure operators, which are then leased to BYT, as anchor tenant through a long-term master service agreement, and other retail operators at a contractual price.

By 2027, SDFAST is expected to provide fibre access to an addressable market of approximately 20m of households, including 4m in medium-density areas and 16m in low-density areas.

SDFAST is therefore acting as a one-stop shop for FTTH access in the French rural and medium areas, providing retail operators with IT and administrative interconnections with various infrastructure operators. The transaction is highly beneficial for all parties.

Relying on Vauban's significant experience in the field of fibre deployment, SDFAST’s one-stop solution provides to BYT and third-party operators long-term access to all medium and low dense areas with the same partner, and from the infrastructure operators’ perspective it provides telecoms operators with the financial firepower to co-invest in their FTTH network by sharing the deployment capex costs required to meet their obligations to the French telecoms regulator (ARCEP) on time.

More specifically, it allows BYT to benefit from the financial efficiencies generated by the IRU deployment scheme.

This transaction strengthens the collaboration between BYT and Vauban in the digital sector, initiated with project Cityfast (2018) aiming at the very dense areas and project SDAIF (2020) aiming at the medium dense areas deployed by Orange Concessions, completed together. With this new project, BYT is now able to fully secure access to the entire FTTH network in the French territory, while Vauban consolidates its presence in low and medium density areas.

Transaction challenges

The main challenge was to secure long-term financing for a deal of this size, therefore seeking liquidity from various sources to achieve competitive terms. Considering that the project aimed at financing long-term rights of use (IRU) as opposed to financing the fibre network deployment directly, another challenge for all parties was to get comfortable with such a IRU model governed by specific contractual terms stating specific principles, objectives, scope, tenor, and price evolution mechanisms.

The timing of the project made the transaction even more ambitious on the back of increasing interest rates putting pressure on cashflows and debt sizing, and making the pre-hedging exercise crucial for the successful execution of the deal.

The way to overcome these challenges was to provide a tailor-made financing structure to suit both shareholders’ needs and offer adequate flexibility to the company, while being well structured to attract investors at competitive pricing.

Financing structure

Crédit Agricole CIB worked closely with Vauban and BYT to structure a highly competitive tailor-made financing with the primary objective of replicating SDAIF’s 2020 long-term financing structure while further optimising the terms of the debt package in order to enhance the competitiveness of the envisaged structure.

Key features of the financing are described below:

* Long-term financing backed by a master service agreement – SDFAST's 20-year financing structure primarily relies on a long-term master service agreement entered by BYT (i) granting SDFAST exclusivity on all BYT FTTH access in its footprint; and (ii) ensuring minimum revenue levels for SDFAST.

These key structuring parameters allow SDFAST to remain resilient to downside scenarios. It also enables lenders to rely on BYT’s credit risk – Bouygues’s investment grade credit profile was very helpful in this respect – and on its ability to gain market share in the FTTH market in rural and medium dense areas in France. In addition, the pre-determined rental fee payable by BYT to SDFAST gave an excellent visibility to SDFAST’s cashflows.

* Pledge on IRU rights – The intrinsic value of SDFAST relies on the IRU of the infrastructure operators' FTTH network acquired by SDFAST, as opposed to the typical ownership of the FTTH network itself. These IRU rights are granted for a 20-year period with an automatic extension for an additional 20 years, therefore exceeding the maturity of the debt package and of the master service agreement. The pledge on IRU rights was granted to lenders as an additional mitigant.

* Project finance style features – The overall structure is based on documentation with project finance style features providing lenders with an adequate level of control: (i) drawdown tests with minimum penetration rate thresholds to acquire IRU rights; (ii) financial covenants such as maximum gearing and minimum LLCR during the availability period of the debt and subsequent minimum DSCR; and (iii) a pledge over the shares and IRU rights. Additionally, the financing was structured as one of the first social loans in the sector, being aligned with the four core components of the LMA/APLMA/LSTA’s Social Loans Principles 2021.

Syndication and lenders

The €1.6bn financing package was fully underwritten by Crédit Agricole CIB, with a structure providing significant flexibility in order for the debt to ultimately be placed with different types of investors depending on their competitiveness and sponsors’ preferences.

Toby Walker, head of telecoms finance distribution, Crédit Agricole CIB said: "I believe the 100% underwrite gives the client a certainty of the deal and terms but allows significant sizing flexibility on the 20-year fixed and the soft mini-perm in order to optimise terms to fit the clients’ needs, whilst keeping significant investor tension to gain best terms and optimise liquidity. I think it is fair to say that it was the largest sole UW funded in the sector this year, although I would flag the tenor as it is probably the real differentiator to the other recent fibre deals.”

After having approached the market in order to test several structuring features, BYT and Vauban eventually decided to proceed with a mix of different tranches to access different markets: (i) a long-term amortising fixed-rate bond issue privately placed with institutional debt investors and (ii) a long-term soft mini-perm facility as well as some shorter-dated ancillary tranches for banks.

The ability to tap both the institutional and bank markets enabled the sponsors to maximise liquidity in order to swiftly and efficiently place the large debt amount in spite of a volatile market environment and a significant pipeline of competing digital infrastructure transactions, with several jumbo fibre deals having been placed this year. It also allowed the sponsors to benefit from both the duration and capital stability provided by institutional investors, and greater flexibility from banks to accommodate long availability periods. The financing was well oversubscribed thanks to the strengths of the deal, and all investors eventually signed just before the summer slowdown.

* Syndication lenders – BPCE Group (Caisses d’Epargne, BRED, Banques Populaire), BBVA, MUFG, Caixa, SMBC, CIC, Helaba, Norinchukin Bank, KfW, Bank of China, LBBW, Sabadell, and KEB-Hana Bank; and institutional investors AG Insurance, Allianz, Blackrock, CIC Private Debt, Infranity, LBPAM, MEAG, Rivage, Samsung Life, and Schroders.

Key takeaways

* SDFAST perfectly fits with ARCEP's clear strategy to accelerate the fibre-optic rollout in France and reach the target of 100% ultra-fast broadband coverage in the short term. The stable and supportive regulatory environment in France was key for lenders and international investors to get comfortable with the IRU scheme and trust the sustainability of the SDFAST business model.

* Long tenors can be a competitive option in the fibre space for the right transaction and debt structure.

Crédit Agricole CIB acted as the sole underwriter, sole bookrunner, sole contingent swap provider, hedge and social loan coordinator, as well as M&A adviser for Vauban on the deal. In addition, Vauban was advised by Clifford Chance, legal: corporate, financing, antitrust issues, Analysys Mason, market, EY, tax and auditing, and Aon, insurance. Bouygues Telecom was advised by BDGS, legal: corporate and financing, Eight Advisory, financial and Darrois Villey Maillot Brochier, antitrust.

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