Australia-Japan Cable: Structuring
The Project Company
Group – 1: Section – 1
Bharat Agarwal
01
Sumit Bhatia
08
Saravanan C
09
Manuja Chaudhary 10
Sharad Chopra
11
Varun D
12
Agenda
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What the case is all about?
Project Assets- Characteristics
Capital Providers
Return on Investment
Current Status of AJC Project
The Case
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Australia – Japan Cable (AJC) project
Project finance to be used
Feasibility study to be done
Various strategic partners
Analyze the risks
The Industry
• Cable technology
• Changes in the market conditions
• Customer needs
The Technology
• Evolution of the Cable Systems
DWDM
Fiber-Optic
Cables
Coaxial
Cables
Submarine
Fiber-Optic
Cables
The System
Physical
Cable
Repeaters
Transmission
Equipment
Submarine
Cable
System
The Process
The Precautions
• Deep water and Shallow water
• Durable and Reliable cables
• Loops
The Demand
The Financing
Clubs
• Up to 90 Sponsors
• Projects took
longer time to
complete
• Why the model
was followed?
Private Deals with
Carrier Sponsors
• Large blocks of
capacity needed
• Competition
increased
• Small number of
carriers
• Using as well as
selling capacity
• “Co-opetition”
Private Deals with
Non-Carrier Sponsors
• The Pacific Group
• Built the cable and
sold the capacity
• Atlantic Crossing-1
(AC-1)
Building the System
• Choose equipment suppliers
• Hire Cable Ships
• Access to landing station, right-of-way permits
and harbor clearance
The Australian Submarine Cable
Industry
• Access to Asia and United States
SEA-ME-WE3
The Australia – Japan Cable (AJC)
• Telstra commissioned $6 million feasibility
study
• Cable system via Guam
• How AJC came to life
• Philosophy for AJC
The Process
• 12,500 Kilometer cable system, with initial 40
Gbit/s capacity
• Use Telstra’s 2 landing stations near Sydney
• AT&T in Guam, to use landing stations
• Obtaining access to landing stations in Japan
The Estimates
• Primary estimate = $520 million, or $567
million if there were delays
The Estimates contd..
• Two 40 Gbit/s upgrades during first 5 years
• Ability to increase capacity to 320 Gbit/s
• Cost of upgrading
– Money = $25 million per 40 Gbit/s
– Time = 12-15 months
• Estimated useful life = 15 years
The Strategy
• Private carrier deal using a project finance
structure to fund construction
• Why project finance?
– Limit the amount of equity to invest in the project
– Significant role in running the company (holding
40% equity)
– Something for the partners too
– Reduce the investment size to $30-$40 million
The Strategic Partners
• Need for long-term relationship
• Feasibility showed there was demand and the
expected cash flows could support a highly
leveraged capital structure
• Japan Telecom and Teleglobe signed MOU
with Telstra
The Structuring
• Timetable:
June 30, 2001 – “Ready for Service”
June 2000 – Financing to be in place
April 2000 – Release Information
memorandum, sign agreements and sign
supply contract
March 2000 – Structure the Project
company (a separate legal entity under
the project finance structure)
The Issues to be Resolved
• Show there was demand for a new cable
– A realistic business case
• AJC’s advantage relative to existing cables
– Compared to SEA-ME-WE3
• Need to attract high quality sponsors
Q1.
How would you characterize the project
assets?
What makes them different or unique?
Project Assets
Company
Owned Assets
Leased Assets
Optical
Fibers
Landing
Station
Repeaters
Cable Laying
Ships
Connectors
Routers
Asset Characteristics
• Financial Structure
– Asset financed through 85% debt and 15% equity
– Sufficient demand ensured cash flow to support such a
financial structure
Total Debt ($mn)
482
Asset Coverage Ratio = 1.0788
 ACR supports the financial structure
 Existing capacity of 40 Gbit/sec can be raised to 320 Gbit/sec
Asset characteristics
• Salvage value
– High Cost of Recovery
– Zero Salvage Value
• Utility
– Assets are Project specific
– Assets are in public domain
– No reusability
• Operational Risk
– Cable Failure due to shipping, dredging and fishing activities
– Landing Station
• Difficult to get approval to build new one
• Contract with existing Landing station owners
Asset Uniqueness
• Security
– Flow of Confidential Information
• During wars nations have cut the cables of the other
sides in order to stop or shape the information flow
– Threat of Theft by Pirates
• Mar ‘07 Pirates stole an 11 kilometres Submarine cable
connecting Thailand, Vietnam, and Hong Kong
– Accountability for Damage
• Protection zones has been identified
• Guided by United Nations Law of the Sea Convention
Asset Uniqueness – Contd…
• Impact due to Failure
– Nations get affected due to Communication disruption
– 2008 disruption in Persian gulf caused problems in India and
Middle east
– Reason for failure is difficult to identify
Q2.
Who are the capital providers for AJC
project?
Are they likely to earn an appropriate risk
adjusted return on their investment?
Risks Associated with Project
• Market Risk – Price (25% decline per year) and Demand Risk
• Completion / Delay Risk - Risk Of Delay in execution
• Strategy Risk – Existing Competitors
• Threat of New Entry
• Technology Risk – Alternatives to existing technology
• Construction Risk – Late equipment supply / delivery
• Operating Risk – Equipment Failures, difficulty to get permission for
new landing stations
• Financing Risk – Due to covenants (CP) , refinancing required
Mitigation of Risks
Risk
Hedging Strategy
Market Risk
1.Pre-sales capacity contracts from highly rated companies
covering approx 2/3rd of total project cost
&
2.Collapsed ring configuration (lower cost)
Price Risk
3.Low cost capacity across North Pacific
Completion (delay) or
Counter party risk
1.Incorporate procedures to allow AJC to draw funds for
construction even if there were delays
2. Existence of delay contingency in funding
3. Environmental approvals & other permits
4. Right of way permits
Strategy Risk &
Competitor Risk
Co-opetition & collaboration
Mitigation of Risks
Risk
Hedging Strategy
Technology Risk
&
Threat of New Entry
Faster launch so that technology does not become obsolete
Operating Risk
1.High Expertise Level of cable suppliers
2. Shared Ownership with companies having Landing-Stations
3. Provisions & Insurance
Construction Risk
Supply contracts signed in advanced, existence of construction
contingency
Environment Risk
Insurance
Qualitative factors Considered while
considering Risk Adjusted Return
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Projected Demand on this route
Existing Supply-Demand Position in Australia
Other projects (SCCN)
ABN Amro – Financial Strategy Advisers
Views of NTT Communication
Shareholder agreements with high rated sponsor users
• Project Finance Structure
• Management / Governance Structure
Projected Demand Growth North America to Asia
Projected Demand
1600
1400
1200
1000
800
Capacity (Gigabits)
600
400
200
0
1997 1998
1999E 2000E 2001E 2002E 2003E 2004E 2005E
Existing Demand Supply & Shortfall
600
500
400
300
Forecast Demand
200
Total Existing Supply
Shortfall
100
0
1999E 2000E 2001E 2002E 2003E 2004E 2005E
-100
-200
Existing Supply in Australia
• Australia’s Telecom carriers needed greater access to :
• Asia (Australia’s largest trading partner)
• US (80% of all Internet hosts were located here)
• In 1999, there were 3 cables for Australian Traffic:
• SEA-ME-WE3 (Access to US from West Coast)
• Excess capacity
• Prone to cable failures due to extensive shipping,
dredging, and fishing activities
• PacRim East (Access to US from East Coast)
• Full Capacity
• PacRim West (Access to US from East Coast)
• Full Capacity
SCCN
AJC
• 29,600 km linking East Coast of
Australia, New Zealand and the
US
• 12500 km linking East Coast of
Australia, Japan & US
• 40 Gbit/s capacity upgradable to
120 Gbit/s
• Capacity - 40Gbit/s upgradable
to 320 Gbit/s
• Debt-to-total-capitalization ratio
of 85%
• Gearing ratio – 85%
“AJC had to be bigger, safer & cheaper than SEA-MA-WE3 for
traffic to US & it would be roughly the same cost as SCCN”
ABN Amro – Financial Strategy Advisers
• ABN had successfully led SCCN financing
• Believed that AJC could support high gearing Ratio (as high as
85%) as they had identified and mitigated most of the risks
Views of VP, NTT’s international network –
Potential Sponsor
• No previous cable connecting Japan and Australia
• AJC would offer the lowest cost if the dividend to
shareholders was taken into consideration
• AJC would be an attractive addition to the business in their
existing cable stations
Keating, Project Finance Manager, Telstra
• AJC needs high rated sponsor for bankers to lend
Hibbard, Managing Director, Telstra
• Greater harmony in decision making by linking
ownership & cable use by requiring sponsors to sign
purchase agreements
• Requirement of good Project Management &
Governance Structure
Sponsor Selection
Japan Telecom
Teleglobe
NTT Comm
AT & T
Landing Stations
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Buyers
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-
Investors
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S & P Senior
Debt Rating
AA
BBB+
AA+
AA-
Sales (millions)
$3,117
$1,701
$71,591
$53,223
Net Profit
Margin
1.9%
-2.5%
2.2%
12%
Operating
Margin
16.7%
19.1%
42.9%
23%
Asset Turn Over
73%
28%
54%
89%
RoA
1.4%
-0.7%
1.2%
10%
Int Coverage
14.94
10.18
17.23
28.37
Debt Equity
Ratio
1.12
0.42
2.17
1.33
Capital Providers
Equity
15% of Total Capital
Telstra
40%
Mn $
85
34
Japan Telecom, Teleglobe &
NTT Telecom
60%
51
70%
30%
Mn $
482
337
145
Debt
85% of Total Capital
Tranche A (5 yrs)
Tranche B (5 yrs)
Repaid with
Pre-sale commitments
Future Sales
Issues with Project Finance
• Decision to use high leverage - 85% capitalization
ratio
• Optimal maturity – Short / Medium
• Repayment Schedule – Bullet / Amortizing
• Covenants package
• Reporting Requirements
• Loan Syndication ( Lead arranger & no. of banks)
• Keating – smaller the lending group, better issue
resolution
• Information memorandum to raise debt
In a nut shell…
• Facts and Qualitative data suggest AJC is a viable
project
• Single Asset Company
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Limited, well defined expansion opportunities
Execution on the core asset important
Debt and Equity ownership to be concentrated
Highly leveraged capital structure to leave minimum
free cash flows with managers
• Mitigation of Agency problems
• Management Compensation aligned to execution
Current Status of AJC
• Partners
– Telstra
– WorldCom Global Networks
– Concert
– Softbank Telecom
– NTT Communications
• ACMA Submarine Cable Regulation
• Upgraded to 1000Gbit/s capacity
Purchase Options
• Indefeasible Rights of Use
• Annual Lease
– Growth Lease
– Lease to Buy
– Short Term Lease
– Ad hoc Capacity
Latest trends
• In 2009 – Partnership between AJC and Pacific
Crossing
• Bharti Airtel and AJC – Australia, Singapore and
US
• Lower Indian Ocean Network
– 37 million Euros
– Orange Madagascar, Mauritius Telecom, France
Telecom
– 1070 Km with 1.3TB capacity
Thank You