Compare the effective cost of debt faced by Jazztel with the

CASE STUDY In order to minimize speculative infrastructure investment, the company had developed a geographic mapping database to guide the construction of the network The database covered 92 cities across Spain, including the locations of over 400,000 businesses within these cities. The database also provided information on telecom spending and existing telephone lines, enabling Jazztel to optimize the locations of the MANs by building the network so that it passed by as many target businesses as possible. The database took several thousand person-hours to construct FINANCING STRATEGY Venturecapitalistand serialentrepreneur Martin Varsavskyprovided Jazztel\'sinitial operating capital of pesetas (Pts) 60 million in June 1998. In February 1999 an ad- ditional 643 million of equity was raised from several private equity firms, such as Apax Partners and Advent International, which specialized in the financing of firms, In April 1999, Jazztel expanded its financing base, successfully raising a two- tranche high-yield issue of 203-4 million. The offeringconsisted of 1o0,000dollar- denominated units and 110,ooo euro-denominated units, Each unit was worth $1,000andi,ooo,respectively,andcarried fivewarrants for the purchase of Jazztel stock. The 10-year notes carried a coupon rate of 14 percent. Of the 203-4 million in proceeds, 794 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 300 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 100 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. Bothtranches 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 for- 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 to date, The peseta(Pta) was Spain\'s national currency until Spain joined the euro-zone on January1, 1999, adopting the euro as its currency at the exchange rate of Pta 166

Solution

ECD Comparison

Loan @8%

$

450 Million *.08

36

PMT(Monthly)

(PMT(rate/12,nper,pv,fv,type)

5459742

Annual rate

8%

10 Yr FV

$

$1,997,676,211.09

Number of payments

120

10 Years FV

$

449653500

Loan Amount

450000000

ECD

$

0.114858487

Monthly payment

$5,459,741.75

Loan @7.125%

Euro

Euro 340 Million * .07125

24.23

PMT(Monthly)

PMT(rate/12,nper,pv,fv,type)

3969627

10 Yr FV

Euro

$1,384,192,547.06

Annual rate

7.13%

10 Years FV

Euro

33748740000

Number of payments

120

ECD

-0.467113042

Loan Amount

340000000

Monthly payment

$3,969,627.07

ECD Comparison
Loan @8%		$	450 Million *.08	36
PMT(Monthly)			(PMT(rate/12,nper,pv,fv,type)	5459742		Annual rate		8%
10 Yr FV		$	$1,997,676,211.09			Number of payments		120
10 Years FV		$	449653500			Loan Amount		450000000
ECD		$	0.114858487			Monthly payment		$5,459,741.75
Loan @7.125%		Euro	Euro 340 Million * .07125	24.23
PMT(Monthly)			PMT(rate/12,nper,pv,fv,type)	3969627
10 Yr FV		Euro	$1,384,192,547.06			Annual rate		7.13%
10 Years FV		Euro	33748740000			Number of payments		120
ECD			-0.467113042			Loan Amount		340000000
						Monthly payment		$3,969,627.07