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

What the case is all about?

Project Assets- Characteristics
Capital Providers
Return on Investment
Current Status of AJC Project

The Case

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

FiberOptic
Cables
Coaxial
Cables

Submari
ne FiberOptic
Cables

The System

Physical
Cable

Repeaters

Transmissi
on
Equipmen
t

Submarin
e 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 (AC1)

Building the System

Choose equipment suppliers
Hire Cable Ships
Access to landing station, right-ofway permits and harbor clearance

The Australian Submarine Cable

Industry
Access to Asia and United States

SEA-MEWE3

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 Telstras 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

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

AJCs 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

Connecto
rs

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 11kilometres 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

&
Price Risk

2.Collapsed ring configuration (lower cost)

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
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

1600

Projected Demand

1400
1200
1000
800
600
400
200
0

Capacity (Gigabits)

Existing Demand Supply & Shortfall

600
500
400
300
200
100
0
-100
-200

Forecast Demand
Total Existing Supply
Shortfall

Existing Supply in Australia

Australias Telecom carriers needed greater access to :
Asia (Australias 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

Debt-to-total-capitalization
ratio of 85%

Capacity - 40Gbit/s
upgradable to 320 Gbit/s
Gearing ratio 85%

AJC had to be bigger, safer & cheaper than SEA-MAWE3 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, NTTs 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

Buyers

Investors

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

Capital Providers
Equity

Mn $

15% of Total Capital

85

Telstra
Japan Telecom,
Teleglobe & NTT
Telecom

40%

34

60%

51

Debt
85% of Total Capital
Tranche A (5 yrs)
Tranche B (5 yrs)

70%
30%

Mn $
482
337
145

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

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