FINANCING STRATEGY Venturecapitalist andserial entrepreneurMartin Varsavskyprovi

Question

FINANCING STRATEGY Venturecapitalist andserial entrepreneurMartin Varsavskyprovided Jazztel'sinitial operating capital of pesetas (Pts) 60 million in June 1998. In February 1999 an ad- ditional 64.3 million of equity was raised from several private equity firms, such as Apax Partners and Advent International, which specialized in the financing of telecommunication firms In April 1999, Jazztel expanded its financing base, successfully raising a two- tranche high-yield issue of 203-4 million. The offering consisted of 10o,ooo dollar- denominated units and 110,000 euro-denominated units. Each unit was worth $i,oooand1,000, respectively,and carried five warrants forthe purchase of Jazztel stock. The 10-year notes carried a coupon rate of 14 percent. Of the C203.4 million in proceeds, e79.4 million was placed in an escrow ac- count to fund the first six biannual interest payments through 2001. No interest payments from company cash flow were scheduled until 2002. It was the largest such offering ever completed by a Spanish firm. Furthermore, the offering was two times oversubscribed. In July, to further support its capital expenditures (capex) requirements, the company secured a 30o million senior secured credit facility from a syndicate of banks, including Argenteria SA, Barclays Plc, and Chase Manhattan Corp., among others. The facility entailed two tranches: a 200 million term loan and a 10o million revolving facility. The term loan (Tranche A) carried an interest rate of 3.75 percent over Euribor. The revolving facility (Tranche B) carried an interest rate of 2.50 percent over Euribor. Both facilities had an eight-yeartenor. Both tranches were available subject to an extensive series of availability tests. Drawdown was monitored by ongoing operational and financial covenants, such as minimum coverage ratios and minimum annualized direct customer revenue levels. Although owning its own network was expected to eventually lower operating costs, the required capital expenditure for the network build-out was midable. Management expected cumulative capital expenditures to reach €566 million through 2003 with an additional 261 million required through 2008 Additional funding was required, and the timing seemed right for another round of financing Jazztel's initial debt offering had been assigned a rating of Caa2 by Moody's; however, management was hopeful that the company's favorable progress tod ate The peseta (Pta) was Spain's ational currency until Spain joined the euro-zone on January until Spainjo e1. adopting the euro as its currency at the exchange rate of Pta 166

Explanation / Answer

The one of the main risk associated with all the notes and bonds is the interest rate risk, However each bond carried call provision for which firm is secured with decrease in interest rate.

If call provision is their than As Interest rate decreases Bonds price increases for which seller could get higher price by redeeming its bonds.

Medium Term Notes have different definition although it comes with the maturity from 5-10 years.

By this definition all the Notes / bonds mentioned in question are medium term notes.

One risk that is faced by all the bonds and notes is Interest rate risk as explained above however it has been removed by having a call provision, other than that we have below risk associated with the debts as below:-

1) March 1999, Colt telecom group:-

This have a convertible debt provision also along with callable provision. Through Convertible debt provision, investor can convert their debt into the ongoing profit in shares, However this provision is helpful for borrowers as they do not have to pay a coupon or interest for debt also they are not liable now as per the debt obligations or covenants as investors had converted their debt into shares.

This conversion although may increase the cost of capital for the firm as more weightage will be given to equity part and decreases leverage ratio.

2) Senior Secure Credit Facility:-

For the senior secured credit facility as per the covenents Comapny has to maintain some minimum level of coverage ratio's and revenue level for continuation of this secure credit.

3) Downgrade of credit rating:-

If the firm rating decreases than financial borrowing becomes more costilier i.e. Firm Borrowing cost increases, they have to pay more coupon or interest rate for serving the debt.

4) KPNQwest BV, Energies Plc and Global Telesystems:-

These 3 bonds / notes have call feature applicable only till 2004 after that if interest rate decreases, company will not be able to redeem its bond and they have to serve the bond with higher coupon rate only so in above all 3 cases interest rate risk is associated after 2004. (Last callable year)

Also Energies Plc and Global Telesystems do not have fixed coupon payment, their coupon rate is variable and associated with other benchmark rates as Euribor, i.e. as Benchmark rate increases euribor increases and this will lead to increases in coupon payment. i.e. In high interest rate market coupon payment will be high and in lower interest rate market coupon payment will be low.

In the variable coupon payment borrower have a risk of payment of high coupon whereas in Fixed borrower has to pay a fixed coupon even market rate increases.

These are the main and some of the risks associated with the mentioned medium term notes covenants and provisions along with macro conditions.

Thank You!!

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