GE Capital Backstops Arbinet

In the life of a company, certain deals are watersheds. These deals can change perceptions toward the company, providing strong validation of the business plan and spurring growth. GE Capital’s recent decision to partner with Arbinet-thexchange Inc. could represent such a watershed deal for the fast-growing online voice-minutes telephony exchange.

In December, Arbinet signed a deal with GE Capital Commercial Services that harnesses the might of GE Capital’s balance sheet to Arbinet’s vision for the voice-minutes trading market.

“GE Capital understood right away what we were trying to do,” says Arbinet CEO Curt Hockemeier.

GE Capital will support Arbinet with global credit-risk management by providing financial guarantees for most trades executed on Arbinet, as well as a variety of other financial services and back-office functions.

“This provides a means for our members to increase network utilization and reduce sales and marketing, operational, bad debt and capital costs at a juncture when telecommunications industry earnings are under heavy siege,” Hockemeier says.

According to Joe Krum, president of GE Capital Commercial Services, Arbinet’s e-commerce application is distinguished by its ability to integrate the physical delivery of bandwidth via switching and routing equipment with an online marketplace.

“Enhancing the credit risk management and financial settlement services allows thexchange to safely scale its role as the counterparty to all transactions,” Krum says.

Arbinet is a true exchange in that carrier members simply place orders to buy or sell voice minutes and Arbinet automatically routes the buying members’ voice traffic to the selling member’s network using the least-cost route. Arbinet competitors, such as Band-X, simply provide an online forum for buyer and seller to negotiate then execute the switch.

Clearly trying to push the telephony trading envelope, Arbinet wants to create true commodity-like trading in voice minutes. On commodity exchanges like the Chicago Board of Trade and the New York Mercantile Exchange, traders do not actually enter into deals with one another, but instead trade with a clearinghouse owned by the exchange that is the real counterparty to all transactions. The clearinghouse acts as a financial guarantor and backstop to all trans- actions — something that Arbinet also does for its voice-minutes exchange. It is in this clearing-house/counterparty function that the GE Capital deal will prove critical. By furnishing the financial guarantee for most trades, GE Capital can provide the financial muscle that will make Arbinet’s clearinghouse role financially credible.

“With our small balance sheet, and given that we act as counterparty to all trades on our exchange, it would have been impossible for us to grow as planned without a strong financial partner,” says Bob Vaters, CFO at Arbinet. “It gives us huge credibility to have a financial partner like GE Capital. The more risk from our exchange that GE underwrites, the faster we can grow under our business model.”

And Arbinet has indeed been growing fast lately. Vaters says Arbinet processed more than 5.8 million transactions in November, a 49 percent increase from the previous month. The firm’s membership roster has more than tripled over the past year to 100. Arbinet refuses to divulge the names of its carrier members publicly, but the list reads like a Who’s Who of Tier 1 and Tier 2 carriers.

Driving the surge in interest in Arbinet has been the new, much tougher telecommunications financial environment. By providing a centralized telephony exchange infrastructure, Arbinet is creating a framework whereby voice networks can become more closely interconnected and managed more efficiently. Arbinet’s ability to streamline the process of negotiating and managing voice minutes deals between carriers is at the heart of the exchange’s appeal, helping drive down telecom industry selling, general and administrative costs. Carriers looking to cut SG&A have been coming to Arbinet in an effort to boost sagging bottom lines. The deal with GE will now allow Arbinet to offer another area in addition to SG&A in which it can deliver cost savings for carriers: bad debt expense.

By entering a wholesale voice minutes transaction on Arbinet, carriers will essentially be doing a deal with the AAA-rated balance sheet of GE Capital, effectively outsourcing the credit-risk function and taking much of the credit risk off their balance sheets. The ability to better manage bad debt exposure will become increasingly necessary as the shakeout among upstart carriers widens.

“Carriers currently have to provision anywhere from 2 percent to 6 percent of their wholesale revenues against nonpayment,” says Vaters.

GE Capital’s AAA-rated backing should drastically reduce these costs for Arbinet users.

This will all be very appealing to carriers who seem to issue downward earnings guidance almost daily. The benefits of the GE Capital deal are likely to be a very potent arrow in Arbinet’s competitive quiver as the battle to dominate the voice-minute exchange space intensifies.

Ted is a Telecom Business contributor and freelance writer based in Chicago.