Sale/leaseback transactions may still be a small part of the overall European Telecom business, but in terms of raising cash outside of conventional sources, they're the alternative method-of-choice for companies looking to monetize their bricks and mortar.

According to many market sources, more and more European corporations are catching on to the U.S. model of "If you're not in the real-estate business, don't own real-estate."

"It's beginning to be a major change across Europe that we are starting to see from a whole range of corporations, not just telecoms," said a market analyst. "We may see telecoms more aggressively pursuing this avenue because their capital needs are more pressing; but in general, we can expect to see quite a bit of business going forward from a larger range of corporations."

Essentially, the sale/leaseback structure is a way for telecom companies to utilize the capital they have tied up in real estate. Buyers are typically either leverage opportunity buyers or long-term asset management players. In the past two years, a number of European telecoms have made forays into this financing tool, including deals from Deutsche Telecom, British Telecom, France Telecom and Telecom Italia.

Forthcoming transactions will include smaller European countries, said one analyst, who added that he was not at liberty to disclose any further information because the deals in question have not yet been finalized. Nonetheless, corporate motivation to continue utilizing the sale/leaseback structure is apparent. France Telecom is currently in the process of selling its second portfolio, and it is likely the market will see increased sale/leaseback issuance from telecoms with terms between five and 15 years.

Securitizing

real-estate assets

Despite the forward-looking promise of real-estate asset securitization, the only deal that has been completed to date is the Telereal securitization issued by British Telecom.

Monoline provider Ambac wrapped the deal. "The Telereal deal was a property sale and leaseback," said a spokesman at the company. "The deal was classified as a CMBS, but we wrapped it because we understood that the properties were essential strategic assets. Normally, the value of security in a CMBS is that you can sell it if things go wrong, but the value of security in Telereal is that the assets will always be needed, and therefore someone will have to pay the rent, even if it is the Government."

But Standard & Poor's said that the rating agency treated the transaction as a whole-business deal, as it was effectively a play on the fixed-line networks in the U.K. It's a statute of technical assets that either BT or a subsequent operation of fixed-line networks in the U.K. will actually need to use.

"The core earnings of the incumbent fixed-line businesses are surprisingly robust and predictable, but telephone companies have damaged their balance sheets by expanding outside this core and investing in ways that now look imprudent," added the spokesman at Ambac.

"Securitization will principally come from the core businesses of incumbent fixed-line operations because this is essential infrastructure of national importance; most of their other businesses are not." This is a factor that highlights the utility nature of telecom companies, and has allowed monoline insurers to get comfortable with such transactions.

The pith of the argument behind the securitization of telecom real-estate assets is comprised of three factors: access to the capital markets over a 15-year period; easier access to the capital markets than that which could be gained through the bank market; and a marginal cost advantage. The major advantage is that such securitizations allow Telecoms access to a large amount of capital over a longer period of time.

Outside of the UK

In continental Europe, the real-estate transactions have developed an angle on the basis of property redevelopment, and have mainly found funding in the bank market. The advantage that securitization might provide in such situations is to offset the competitor, and perhaps to offer more flexibility than bank funding.

"To date, those transactions ended up with a bank funding," said one market analyst, "although people continue to look at those transactions with a view towards securitization." He added that currently he was looking at one such deal. "The continental portfolio is doing much more of not only the fixed-line network, but also a general surface of real estate within the deals; these are more likely to follow CMBS style transactions."

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