Access to finance
With the desire to expand business operations, service portfolios and product performance comes the need for large cash expenditures. Telecoms often generate cash for such undertakings from operations, borrowings through short-term and long-term issuances in capital markets and various financial institutions. Each path presents its challenges, with 68.5% of telecoms taking part in the 2018 BDO Telecoms Risk Factor Survey see access to funding as a risk.
The future large-scale investments that many telecoms will undertake in connection with the roll-out of 5G networks will likely lead to increased debt-loads for many companies. At the same time, the previous 4G generation of networks cast a shadow of doubt on the future profitability of 5G. When telecoms began launching 4G networks around 2009, they failed to generate the high returns seen from previous network generations. A counterargument is that 5G networks create opportunities to capture market shares in relation to technologies like the Internet of Things and self-driving vehicles. Whether this is enough to sway lenders remains an open question.
At the same time, the telecoms industry has been moving from relatively low-risk towards more complex and weak credit profiles due to factors like increased competition and lower earnings per customer. In other words, future earnings are not as carved in stone as they used to be.
Analysts at financial institutions may well look at the space and wonder if the future revenue of telecoms will be enough to pay back loans and interests, or if new investments in infrastructure will lead to the same predictable long-term earning potential they used to. The same applies to financial needs for mergers and acquisitions. Our survey shows that half of telecoms see ‘changes to assumptions in profitability’ as a risk, perhaps echoing these points.
Access to finance-risk looms largest for telecoms companies in the Americas (81.3%) and APAC (83.3%) while 59.4% of European telecoms see access to credit as a risk.
“The access to finances for infrastructure projects and large-scale M&A continues to be a pressure point for telecoms companies. On the funding side, the dropping revenue per customer in the telecoms sector is something that could make some lenders reticent to finance big loans. Further exacerbating matters are uncertainties regarding regulatory changes and new laws such as the European GDPR, which presents new risks for the industry. Also in relation to long-term earning potential.“
Jakob Sand, Leader of Technology, Life Sciences, Media & Entertainment and Telecoms transactions