Post on 13-Jul-2015
Australia-Japan Cable: Structuring The Project Company
Group 1 PIYUSH DEWAN SWAPNIL SHAH SRIHARI SIVARAMAN SHREYA SOOD AJAY TIRUMALAI GAURAV VAIDYA
AgendaCase background
Project Assets- Characteristics
Providers of capital
Return on Investment
Case Background12,500km cable from Sydney, Australia to Japan via Guam at a cost of $520m. Sponsors Telstra , Japan Telecom, Teleglobe DetailsRFS date, June 2001 Financial Advisor : ABN AMRO Capex is $25 mm/40 Gbits/sec
Industry overview
CAGR
10.2%
USD 348 billion to USD 835 billion Fall in prices 20% to 40% per year 25% CAGR over 10 yearsCumulative Present Value of Revenue as Percent of Total 10-Year Revenue (by Year) Annual Rate of Year 1 Year 3 Year 5 Year 7 Price Declines 0% 10% 20% 30% 40% 50% 15% 21% 28% 37% 46% 55% 40% 52% 64% 75% 84% 91% 62% 73% 83% 91% 95% 98% 79% 87% 93% 97% 99% 100%
Rapid changes in technology Key Issues
limited growth potential Market risk from fast changing telecom market Risk from project delay Specialized use asset: Need to get buy in from
landing stations and pre-sell capacity to address issue of Hold Up
Significant Free Cash flow
The FinancingClubs Up to 90 Sponsors Projects took longer time to complete Why the model was followed? Large blocks of capacity needed Competition increased Small number of carriers Using as well as selling capacity Co-opetition
Private Deals with Carrier Sponsors Private Deals with NonCarrier Sponsors
The Pacific Group Built the cable and sold the capacity Atlantic Crossing-1 (AC-1)
Demand for submarine cable route
Australian Submarine Cable IndustrySCCN Initially equipped with 40 Gbit/s 3 sponsors Construction in 1998. 85% - Debt/total-capitalization Merrill Lynch
Capacity in Gigabits Existing Capacity Southern Cross Cable SEA-ME-WE3 Upgrade Total Existing & Planned Capacity Forecast Demand
1999E 27 0 0 27 10
2000E 27 120 20 167 25
2001E 27 120 20 167 63
2002E 27 120 20 167 129
2003E 27 120 20 167 209
2004E 27 120 20 167 320
2005E 27 120 20 167 470
Q1. How would you characterize the project assets? What makes them different or unique?
Project assetsRepeaters
Landing Station
Company Owned AssetsPhysical CableTransmission equipment
Leased AssetsCable Laying Ships
Asset Characteristics
Financial Structure Financed through 85% debt and 15% equity Total Assets ($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 communicationFlow 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 AJCWe 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 BTranche 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?