Telecoms Update: Spring 2020
Welcome to the spring edition of our Telecoms Update. In this issue we review telecoms regulatory updates and a number of key considerations that arise on debt financing.
Telecoms Regulatory Updates
European Commission approves Irish State aid for the National Broadband Plan
In November 2019, the European Commission (“Commission”) approved the Irish Government’s National Broadband Plan (“NBP”) under the EU State aid rules and the Commission’s 2013 Broadband Guidelines. The 2013 Broadband Guidelines allow for public interventions where private investment in broadband is not sufficient and aim to protect private investment and competition in the market.
The NBP aims to address connectivity deficits in Ireland and to promote the deployment of a Next Generation Access network in areas of the country where there is no broadband network capable of reliably delivering download speeds of at least 30 Mbps, and where there are no plans for such coverage in the next seven years.
Following its review, the Commission concluded that the NBP’s positive effects on competition in the Irish broadband market outweigh potential negative effects brought about by the public intervention. In particular, the Commission acknowledged the absence of market delivery due to market failures and/or important inequalities in rural areas and concluded that the NBP contributes to the achievement of the objective of common interest (i.e. genuine cohesion and economic development objectives); is appropriate as a policy instrument; has an incentive effect; is proportionate; is transparent and has limited negative effects.
The NBP is the second, and by far the largest, Irish measure to be assessed and approved under the Commission’s 2013 Broadband Guidelines.
Brexit and the future of UK roaming
Following the UK’s formal withdrawal from the EU and the commencement of the transition period on 31 January 2020, a key question arises as to the potential impact on both Irish telecoms operators and Irish consumers. The issue of roaming charges will be particularly important in the Irish context given the number of cross-border consumers and businesses moving between Northern Ireland and the Republic of Ireland daily.
During the transition period, which is due to last until 31 December 2020, there will be no immediate change to roaming charges, as the UK will remain subject to the EU rules and any changes that arise, including to the “Roam Like at Home” (“RLAH”) rules.
Following the expiry of the transition period, however, the position will depend on whether or not the UK leaves the EU with or without a withdrawal agreement. In the absence of a withdrawal agreement, Irish mobile operators would be free to introduce roaming charges for customers travelling in the UK and to set tariffs for calls and texts to the UK made by consumers using Irish domestic fixed and mobile services as these would no longer be subject to the intra-EU price caps. The popularity of RLAH plans will undoubtedly play a role in operators’ decisions on roaming.
If the UK leaves the EU pursuant to a withdrawal agreement, that agreement will outline future roaming arrangements and set out applicable charges, if any.
In either scenario, mobile operators should be aware that obligations with respect to transparency and the provision of information to consumers will continue to apply. Operators will, for example, be required to inform customers of any roaming charges that could be incurred when using mobile devices outside of the EU, including in the UK post-Brexit.
Recent trends in ComReg activity
ComReg’s enforcement priorities in recent months continue to be consumer-focused. ComReg issued a number of non-compliance notifications relating to net neutrality transparency breaches in consumer contracts, such as failure to provide information relating to traffic management, information around download and upload fixed network speeds and remedies available to consumers where there is a discrepancy in speed or quality of service. ComReg has also recently taken enforcement action pursuant to the Universal Service Regulations for inadequate contract modifications and complaints procedures.
ComReg is currently consulting on connectivity and decarbonisation and management of radio spectrum interference complaints
At the end of 2019, ComReg published a “Call for Inputs” to enable it to better understand the electronic communications sector’s relationship with climate change and its ability to adapt to a changing environment. A key element will be assessing how the sector can assist in decarbonisation generally, as well as reducing its own carbon footprint.
ComReg is also currently consulting on the management of radio spectrum interference through its Spectrum Intelligence & Investigations Unit (“SIIU”), in order to best direct resources to areas where they are needed most and where the impact of harmful interference has the greatest effect. ComReg acknowledges that the radio environment has changed substantially in recent years with an increasing range of wireless devices utilising a broader range of frequencies. ComReg’s proposals include a new classification regime for complaints and an updated definition of “response time” to mean the deployment of ComReg staff on site to investigate the complaint.
ComReg has published its Q3 2019 report
According to ComReg’s Quarterly Report for Q3 2019, average monthly data usage per fixed broadband subscription increased from Q3 2018 by 18% for residential consumers and 40.6% for business consumers. ComReg also noted increasing consumer take-up of higher speed fixed broadband products with products reaching speeds of over 100Mbps seeing an increase of 6.4% from Q3 2018.
With respect to mobile usage, ComReg reported that 59.8% of all mobile subscriptions were actively using 4G networks in Q2 2019 (up from 55.3% in Q3 2018) and that the monthly usage for the average mobile voice subscriber in Q3 2019 was 202 minutes used, 59 texts sent and 7.2 GB of data used.
 The first was Next Generation Network alongside a gas pipeline in Galway and Mayo (December 2013)
Telco companies rely heavily on debt and equity financing. Here we set out a number of key considerations and issues that arise on debt financing which should be read in conjunction with the issues around further capital requirements and dividend policies that we mentioned in the context of joint ventures in our Autumn 2019 briefing.
Ireland has no thin capitalisation rules but does have distributable reserves rules. Distributable reserves rules can create issues for businesses that may be accumulating losses at their early stage or through various investment cycles or for businesses who may need to revalue investments from time to time. As a result, particularly where infrastructure funds are equity investors, it is common to see equity funding structured by way of shareholder loans to facilitate returning invested capital. If structured as shareholder loans, all such returns will be subject only to solvency rules as against both solvency and distributable reserves rules. Any debt providers will therefore need to focus on contractual subordination arrangements in the absence of having the benefit of equity/debt subordination rules applying as a matter of law.
The telco market is heavily regulated which can raise particular issues for raising debt. A stable regulatory environment has meant that Irish telcos have been able to be active in debt markets and such an environment is expected to continue. Particularly for those in the retail sector, GDPR compliance (with potential fines of up to the higher of (i) €10 million or 2% of annual global turnover or (ii) €20 million or 4% annual global turnover, depending on the infringement) will be a key focus.
If the borrower/issuer is the beneficiary of any concession assets, as with other infrastructure assets, specific issues will need to be considered. Many such assets are subject to step in rights for the entity who has granted the concession. Change of control rules are likely to apply that could affect the ability to enforce effectively. Handback provisions, whether on a default or on the expiry of the concession arrangement need to be carefully considered.
If the relevant debt is listed on a regulated market in the EEA, the market abuse rules will apply to the issuer. The market abuse rules are designed in such a manner that they require proactive management and policing by issuers, rather than simply prescribing prohibited practices.
Cyber security is being more commonly considered as one of the principal risk factors for businesses that are integrally reliant on technology for their operations. Obviously telcos fall into this category.
Similar to certain other infrastructure assets, secured debtholders will need to consider the practicalities of being able to realise value on an enforcement event. In addition to the regulatory considerations listed above that may affect enforceability, the telco market is made up of a finite/relatively small number of operators and a finite/relatively small number of financial sponsors/funds who operate in this sector. Therefore, (i) the number of buyers is relatively limited and (ii) the number of people who can manage such assets/businesses for a lender is relatively limited. In practice therefore, certain infrastructure assets including telcos, when a default occurs, are a joint problem for both the lender and borrower, rather than just being a problem for the borrower.