Key legal issues
Active network operator agreements
Investment Control Act
Demand for high-speed internet is growing continuously. As a result, significant investments are being made in many countries to keep up with the increasing demand in bandwidth. This has led infrastructure funds, insurers, banks and other financial institutions to increase their focus on digital infrastructure, which includes, apart from fibre optic networks, towers and data centres.
In Austria, current estimates predict investment volumes of €10 billion to €12 billion in order to achieve full coverage of gigabit-capable internet services, making the country an interesting market for debt and equity investors that specialise in digital infrastructure.
Financing fibre roll-out requires a number of legal issues to be considered. Fibre projects are usually capital-intensive investments. In order not to burden the investor's balance sheets, these projects are typically financed off-balance sheet with no or only limited recourse to the sponsors. Lenders only rely on the assets being financed, and more importantly, on the future cash flow stream resulting from the operation of the project. This is the very essence of project finance. As in other infrastructure projects, lenders providing debt to finance a fibre roll-out will need to identify the key risks that may arise in the construction and operation phase of a project and ensure that they are adequately allocated to the party which is best suited to carry them. Some of the key risks include:
- risk of network overbuild – lenders will want to assess the likelihood of parallel fibre networks being constructed and its impact on the borrower's business case;
- ground risk – who bears the risk of unforeseen ground conditions;
- permitting risk – who bears the risk of delays in obtaining public permits or wayleaves; and
- technology risk – who bears the risk either that the technology being put in use is not reliable or that alternative, emerging technologies pose a threat to the project's business model.
Taking security is key for a project finance transaction. However, granting an asset pledge over a fibre network entails more legal and practical challenges than, for example, mortgaging a building. In fact, similar to other infrastructure projects, funders often accept that, for practicability or legal reasons, no asset security is granted and satisfy themselves with taking security over the shares, bank accounts and key project contracts, in particular those which are the basis for the company's cash flow. In addition, where feasible, direct agreements with major project parties and step-in rights for funders may be required. Austrian stamp duty(1) or registration fees may be incurred when creating certain security so funders will need to consider whether these can be avoided in order not to further increase overall transaction costs.
Active network operator agreements
In a three-layer open model, the role of the fibre network owner will typically be separated from the active network operator(s). The active network operator will be contracting with service providers that provide internet services to end users. It will be essential for a bankable project to ensure that the active network operator agreement cannot be prematurely terminated and guarantees a cash flow for the entire life of the loan. The active network operator may even be required to provide credit support, such as a parent company guarantee or a bank guarantee. Funders will also need to check whether the active network operator can be easily replaced by a new operator, for example in the case of a default or insolvency.
While financial covenants customary for project finance, such as debt service cover ratio, loan life cover ratio and gearing ratio, are also seen in fibre financings, funders will additionally expect fibre-specific ratios that relate invested amounts to "homes passed" (meaning the home can be connected to the fibre network) and/or "homes connected" (meaning the customer is using and paying for the service). The advice of the technical adviser will be needed to ensure that these covenants allow for capital expenditure investments according to the business plan, while at the same time protecting the funders from excessive drawdowns.
Lastly, investors and funders of fibre networks will need to consider the Austrian foreign investment control regime. Qualifying as digital infrastructure, fibre networks are considered to be a highly sensitive sector. As such, the acquisition of an Austrian fibre network by a foreign investor may trigger an approval requirement by the Minister for Digitalisation and Economic Affairs. The foreign investment control rules may impose an obstacle to a sale of the investor's stake, entering into a joint venture or in a potential enforcement scenario.
For further information on this topic please contact Wolfram Huber at PHH Rechtsanwälte by telephone (+43 1 714 24 40) or email ([email protected]). The PHH Rechtsanwälte website can be accessed at www.phh.at.
(1) For further information on Austrian stamp duty, see "10 things to know about Austrian stamp duty".