Mike Corner-Jones: for telcos, a high level of debt is now
having a devastating effect in the downturn                                               
                                  
When the economy is strong, life for a telco leader means living with significant debt on the balance sheet. With predictable and growing cash flow streams, and with shareholders seeking the returns that leverage can bring, the debt markets are often the first port of call when new licences are being sought or renewed and when new and replacement infrastructure investment is on the agenda.
But this same high level of debt is now having a devastating effect in the downturn. Companies, some with established operating models and franchises, are now fighting for their very existence as the assumptions that have underpinned their business models, and hence their ability to access the capital markets, are being turned upside down.
The hits are coming from a number of directions. Governments, in their dash for cash, are showing ingenuity in how they raise tax revenues. Conventional methods such as the raising of VAT, social security charges and corporation taxes are being deployed alongside more unconventional methods such as the introduction of mobile taxes.
Licence renewals and the auctioning of 4G licences can also provide welcome opportunities to raise much needed funds by governments under pressure to balance the books.
But it is not just the increase in direct taxation which is providing challenges to the boards of telcos: increases in the direct and indirect taxation of citizens and the loss of jobs resulting from a deterioration in the economy are leading to lower overall levels of disposal income. This in turn is leading to changes in consumer behaviour.
Consumers — supported by regulatory pressure to facilitate speedier number porting — are becoming more discerning in their choice of carrier. The quality, availability and breadth of services provided at competitive prices are now more important than ever and telco providers cannot rely on that customer stickiness and loyalty to brand that they might have done in better times.
Regulators are also impacting on termination rates and unbundling practices, and now have an eye on roaming rates. As a result, consumers have more choices today than they have had in the past in how they communicate and are adept at adopting new technologies and services at better prices.
Competitive bundling and alternative technologies are presenting consumers with the opportunity to enjoy lower overall costs for services that would have had to have been sourced and bought from separate providers. Retention and acquisition costs are coming under severe pressure just at a time when capital investment is essential.
Subscribers are also more willing to look at switching from post-paid to pre-paid and, the unthinkable, to simply reduce usage to save money. These factors mean that the prospect of real revenue growth for many established providers is extremely tough — and sadly, for some, a distant memory.
If political and economic conditions are not giving boards enough headaches, then the struggling capital markets are enough to get boards reaching for the aspirin. At the best of times, bond markets and banks dislike uncertainty, but if lending does take place at all in the current market, it may very well be done at a lower debt multiple than enjoyed in the past by the provider. It will also be offered at a higher price and with tougher covenants.
Even companies that have a good story are often finding negotiations tougher than they have experienced before.
The combination of all of these factors means that the right approach for telcos is to seek professional advice to stop the mistakes that might unnecessarily put the company, or indeed the individual directors, at risk. 
                                         

                        
Austerity measures in Greece and their impact on consumer
spending meant Wind Hellas’s debt was not sustainable 
                                      
                                     
Unsustainable Wind Hellas
                                     
Greek telecoms company Wind Hellas is a key case in point. Its restructuring was one of the most complex and innovative in recent years. The rate and harshness of the financial crisis in Greece, the ensuing austerity measures and their harmful impact on consumer spending and business revenues, meant that by the middle of 2010 the existing debt structure of Wind Hellas was not sustainable.
This was to become one of the most complex restructurings in 2010 — with the use of an unprecedented mix of multi-jurisdictional restructuring methods to achieve the necessary outcomes. The successful restructuring of Wind Hellas would not have been possible without the board’s appointment of strong financial and legal advisors — Morgan Stanley and White & Case, respectively.
The board, senior management team and key financial stakeholders of the company also quickly came to the conclusion that there was a need for specialist restructuring experience at the board level — to supplement the experience of existing board members and to help the company’s senior management drive the process through to a successful conclusion.
In July 2010, the professional services firm Alvarez & Marsal was appointed as chief restructuring officer to the company — a board position with executive powers in relation to the restructuring. This appointment allowed the CEO and CFO of the business to dedicate significantly more time to operational matters than would have otherwise been the case.
As a result, the prompt actions taken by the board, senior management, advisors and key financial stakeholders led to the company being restructured in December 2010, with €1.8 billion of debt having been removed from the balance sheet, leaving the company practically debt free and in a far better competitive position.
So what are the key considerations for a board when faced by some of the scenarios faced by Wind Hellas and others?
                                  
                         
Robust forecasting model
                           
Firstly, the business should have a forecasting model that is flexible and robust enough to provide the board with good quality, well-reasoned information quickly and efficiently. A model that worked in benign economic conditions may not be fit for purpose if the company becomes stressed.
In such situations, the board can find itself meeting more frequently than once a month with information requests having to be turned around much faster than the norm.
Secondly, make sure that you are receiving regular liquidity updates. When cash is tight, the board should be receiving thirteen-week cash flow projections that are updated weekly.
Check to see that the company is working its assets as efficiently as possible. When cash is a critical constraint, often the cheapest and fastest way of raising funds is to look inward at the company’s own balance sheet.
Look at key ratios such as the days sales outstanding, days payable outstanding and days inventory outstanding. How does the company compare with its peer group?
Often cash can be generated by taking simple actions like invoicing more efficiently, collecting in a good time and looking for more favourable terms and deals from all suppliers. You should also ensure that your stock is regularly cleared at sensible prices before it becomes too difficult to sell.
But, if you have already done all this then there are other more advanced approaches. For example, taking a key interest in capital expenditure programmes can also often reap dividends. This is especially pertinent in respect of new licences.
Much prep work needs to be undertaken before bids are made — as is happening now in respect of 4G licences.
The board must ensure that it understands the timing and the level of investment required to deliver the forecast revenues. It also has to have a grip on how this investment will be funded realistically.
This knowledge is a prerequisite in ensuring that the company does not overpay for a licence. If this happens then the company may not have the funds left to actually exploit that licence commercially.
Re-evaluating assumptions made at budget time can also deliver savings. Has new technology become available since the last budget round, meaning that more can be done with less? The board should also keep a sharp eye on what infrastructure projects are being considered, and on what basis, throughout the year.
Crucially, if performance really is deteriorating and a restructuring looms, then a struggling company must call in professional help. A high-calibre financial advisor can provide strategic input and their insights into capital market behaviour can prove invaluable in the short term. An advosor can also play a key role in any negotiations.
The same goes for legal advice. Make sure that you have strong legal restructuring experts providing legal advice to the company.
Finally, a restructuring professional can cast an experienced eye over restructuring plans and can also help the board and senior management in their preparation and implementation. This advisor will be used to working with the financial and legal advisors and, if asked to do so, should be able to join and help the board navigate its way through the storm into those calmer seas. GTB
                             

Mike Corner-Jones is a managing director with global professional services firm Alvarez & Marsal in London. He served as chief restructuring officer at Wind Hellas in 2010