Australia-Japan Cable: Structuring The Project Company

Group 1 PIYUSH DEWAN SWAPNIL SHAH SRIHARI SIVARAMAN SHREYA SOOD AJAY TIRUMALAI GAURAV VAIDYA

Agenda
Case background

Project Assets- Characteristics

Providers of capital

Return on Investment

Case Background
12,500km cable from Sydney, Australia to Japan via Guam at a cost of $520m. Sponsors Telstra , Japan Telecom, Teleglobe Details
RFS date, June 2001 Financial Advisor : ABN AMRO Capex is $25 mm/40 Gbits/sec

Industry overview


CAGR

10.2%

USD 348 billion to USD 835 billion Fall in prices 20% to 40% per year 25% CAGR over 10 years
Cumulative Present Value of Revenue as Percent of Total 10-Year Revenue (by Year) Annual Rate of Year 1 Year 3 Year 5 Year 7 Price Declines 0% 10% 20% 30% 40% 50% 15% 21% 28% 37% 46% 55% 40% 52% 64% 75% 84% 91% 62% 73% 83% 91% 95% 98% 79% 87% 93% 97% 99% 100%

Rapid changes in technology Key Issues

limited growth potential Market risk from fast changing telecom market Risk from project delay Specialized use asset: Need to get buy in from

landing stations and pre-sell capacity to address issue of Hold Up



Significant Free Cash flow

The Financing
Clubs Up to 90 Sponsors Projects took longer time to complete Why the model was followed? Large blocks of capacity needed Competition increased Small number of carriers Using as well as selling capacity Co-opetition

Private Deals with Carrier Sponsors Private Deals with NonCarrier Sponsors

The Pacific Group Built the cable and sold the capacity Atlantic Crossing-1 (AC-1)

Demand for submarine cable route

Australian Submarine Cable Industry

SCCN Initially equipped with 40 Gbit/s 3 sponsors Construction in 1998. 85% - Debt/total-capitalization Merrill Lynch

Capacity in Gigabits Existing Capacity Southern Cross Cable SEA-ME-WE3 Upgrade Total Existing & Planned Capacity Forecast Demand

1999E 27 0 0 27 10

2000E 27 120 20 167 25

2001E 27 120 20 167 63

2002E 27 120 20 167 129

2003E 27 120 20 167 209

2004E 27 120 20 167 320

2005E 27 120 20 167 470

Q1. How would you characterize the project assets? What makes them different or unique?

Project assets
Repeaters

Landing Station

Company Owned Assets

Physical Cable
Transmission equipment

Leased Assets
Cable Laying Ships

Asset Characteristics

Financial Structure  Financed through 85% debt and 15% equity  Total Assets ($mn) = 520  Total Debt ($mn) = 482  Asset Coverage Ratio = 1.0788  Existing capacity of 40 Gbit/sec can be raised to 320 Gbit/sec. Life  Cable life of 25 years, with presold IRU contracts for 15 years

Asset Characteristics Cont.

Utility  Assets are Project specific  No reusability Deterioration  Durable & Reliable; suffered as few as 1 device failure during its lifetime Operational Risk  Cable Failure due to shipping, dredging and fishing activities.

Asset Characteristics Cont.

Landing Station  Difficult to get approval to build new one  Contract with existing Landing station owners Transferability IRU contracts for presold capacity  Capacity can be traded in wholesale market, to other carriers (co-opetition) Rapid technology improvement Salvage value  Zero Salvage Value


Asset Uniqueness

Capacity up gradation for fraction of original cost Security is an issue as critical medium for communication
Flow of Confidential Information Threat of Theft by Pirates Accountability for Damage

  

 

Dependency on landing stations Environment clearance Cross country issues.

Question 2.a)
Who are the capital providers for the AJC project?

Capital Providers for AJC

We recommend a gearing ratio of 85% for AJC: ABN AMRO Total Capital required : $567 million The recommended capital structure : 85 % debt ($482 million) & 15 % equity ($85 million)

Sources of debt : Tranche A & Tranche B

Tranche A: Secured and repaid with presale commitments to purchase capacity Tranche B: Repaid from future sales capacity to other parties

Equity Providers for AJC ($85 million)

Japan Telecom & Teleglobe agreed to sign MOU with Telstra. Later NTT also showed interest in joining AJC.

Telstra was to own a 40% share in the equity ($34 million); the remaining 60% ($51 million) was to be held jointly by Japan Telecom, NTT, AT&T and Teleglobe.

Question 2.b)
Are the capital providers likely to earn appropriate risk adjusted return on their investment?