Vendor financing is becoming increasingly important in a cash-strapped telecom sector.
It involves telecom equipment suppliers extending credit to their customers, the network operators, thereby assuming their credit risk. Many market participants predict that it will play a big part in the development of third generation (3G) services.
Having committed themselves to the massive costs of acquiring 3G mobile phone licences, mobile telecom operators are desperately considering their scarce financing options to complete the roll-out of 3G networks. The established funding routes for operators, in particular bank lending and investment-grade and high-yield bond issues, are both temporarily out of favour, as lenders and investors reassess their overall exposure to this troubled sector.
Vendor financing structures vary widely. They include operating and finance leases, provision of guarantees for bank financing, project financing, securitizations and credit-enhanced structures. The risk to equipment suppliers stems at least in part from the fact that telecoms operators, including Deutsche Telekom, France Télécom and British Telecom, are pressuring them for increasingly favourable terms, after having themselves accumulated substantial debt burdens.