Sprint to the finish on financing projects.

• Author: Chehayl, Peter W.
• Position: International

Since banks stopped begging to lend money for expansion, companies have been scrounging for other financing sources for new projects. Read how Sprint foots the bill for its booming international telecommunications business.

When a company faces the right opportunity to grow significantly through a large-scale expansion, management typically focuses on high returns, increased market share and improved margins -- and rightly so. But it inevitably falls to the CFO to inject the sobering dose of realism that they all know they're in for: How do we take advantage of the opportunity given our potentially limited financial resources?

In the telecommunications industry, the developing world is a fertile field just waiting to be planted. The rate of demand for telecommunications services increases 10 percent to 12 percent annually, compared with overall economic growth of about 3 percent to 4 percent, so it's not surprising that telecommunications companies worldwide are looking at major expansion projects.

While we've found that off-shore telecommunications infrastructure opportunities abound, traditional lending structures won't cover most companies' funding needs on this scale. Some $50 billion is lent each year by the multilateral financial institutions (MFIs) like the World Bank, the International Finance Corporation,the European Bank for Reconstruction and Development, the Asian Development Bank and the Inter-American Development Bank. Of this $50 billion, only 5 percent, or $2.5 billion, goes to financing the growth of telecommunications companies. The problem is we need something closer to $15 billion to do the job. Banks, though eager to get in on growth opportunities in the telecommunications field, are capital-constrained and have become more cautious because of the weakening balance sheets and heavier debt burdens of many players in the telecommunications game. So where's a forward-thinking telecommunications company to turn?

Jeannine Strandjord, Sprint's treasurer, asked us this a few years ago when accelerated global expansion became our company's game plan. In the end, we turned to an approach that has worked for industries whose businesses depend on cash flows rather than balance sheets: project finance.

Project financing is based on cash-flow lending in which repayment is linked to individual transactions usually secured by specific assets. The lending has only limited support from, and recourse to, the project's sponsor (Sprint in our case) and any associated parties. Instead, the project needs to live on its own merits, as it is literally "lifted off" the balance sheet. Project lenders will look at the specific assets of the deal, comparing them to the associatedliabilities, including various forms of debt. In the case of Sprint, the lenders may rely on the fiber optic cable, switches and transmission equipment, not on Sprint, as the security for the loans.

Most importantly, project lenders will look at cash flow from these assets, which will determine the project's ability to service debt. In doing so, the lenders may decide to set stringent requirements that the project achieve specific targets before they release additional funds. These requirements could include specific completion dates, pricing and cost guarantees, customer sign-up schedules, and quality- and service-level commitments.

Another way for project sponsors to comfort lenders is to literally assign specific receipts to them. This is why the approach is so popular for infrastructure projects, which are beginning to include...