Australia Japan Cable

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Structuring the Project finance

Submitted by:Swetha AvulaAnirudh BaliyanPrince BehlRaunak BhagwatPrachi BhandariMayank Bhatia

Question:

What potential problems could arise that would

prevent capital providers to earn returns on their

invested capital?

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Market Risk – Demand uncertainty

Wastage of unused capacity or excess capacity supply by competitors

Mitigation Strategy: Pre-sales capacity contractsSVKM's NMIMS University

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Exhibit 5 Australia Demand and Supply for Capacity (Gigabits)

  1999E 2000E 2001E 2002E 2003E 2004E 2005E

Existing Capacity 27 27 27 27 27 27 27

Southern Cross Cable 0 120 120 120 120 120 120

SEA-ME-WE3 Upgrade 0 20 20 20 20 20 20

Total Existing & Planned Capacity 27 167 167 167 167 167 167

Forecast Demand 10 25 63 129 209 320 470

Source: Company documents.

Market Risk – Price Volatility

Higher the annual price decline, lesser the time period of cash flows generated

Mitigation Strategy: Hedging strategy (Forward Contract)

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Exhibit 3 Impact of Declining Prices on the Present Value of Revenue

Annual Rate of Price Declines

Cumulative Present Value of Revenue as Percent of Total 10-Year Revenue (by Year)  

Year 1 Year 3 Year 5 Year 7  

0% 15% 40% 62% 79%10% 21% 52% 73% 87%20% 28% 64% 83% 93%30% 37% 75% 91% 97%40% 46% 84% 95% 99%50% 55% 91% 98% 100%

Source: Casewriter analysis.

Technological Risk

Access to cheaper and better technology

Mitigation : Co-opetation Launching the cable system quickly Upgrading the existing technology

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Completion Delays

Due to Equipment supply delay Mitigation: Signing supply contracts, selecting credit

worthy and well known suppliersDue to unavailability of cable ships to install

cables and repeaters and for further maintenance Mitigation: Book cable ships in advance

Due to access to landing stations, right-of-way permits Mitigation: Landing party agreements – shared

ownership with landing station owners

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Sovereign Risk : Changes in government policies Mitigation: Higher leverage from various lending

institutions

Hold Up Risk: Enter into long term contracts for Landing stations

Operational Risk: Cable failures due to shipping, dredging and fishing activities Mitigation: Hiring cable ship companies with high

expertise level in maintenanceSVKM's NMIMS University

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Question :

What are your recommendations in terms of: Ownership structureCapital structure Organization structureBoard structure Management compensation?

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Number of sponsors in Project Finance

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Source: economic motivations for project finance (Harvard Business school)

Proposed Ownership structure

Sponsors/Partners Shareholding Asset to table

Telstra 40% Major sponsor

AT&T 15% Landing Station

Japan Telecom 15% Landing Station

NTT 20% Landing Station + Capacity

Teleglobe 10% Capacity

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Need to have good equity contribution to avoid “Hold Up” in the future

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Source: economic motivations for project finance (Harvard Business school)

Capital Structure in Project Finance

Capital Structure

Total Capital Required: Debt : 85% ($ 482 million) Equity : 15% ($ 85 million)

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Reasons for High Leverage

Limit the managerial discretion over project cash flow

Shorter Payback period

Mitigate sovereign risk by reducing reported profits

“Paradox of infrastructural investment” Rather than increasing returns on project, a better

solution is to reduce the risk by careful structuring As sovereign risk falls, the appropriate required

return fallsSVKM's NMIMS University

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Organizational Structure

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14Board of Directors

Chief Executive Officer

Head of Administration

Executive Manager

Chief Financial Officer

Finance Manager

Technical ServicesExecutive Manager

OperationsExecutive Manager

Regional Operations ManagerAustralia

Regional Operations Manager

Japan

Regional Operations Manager

Guam

Head of Sales and Marketing

Board Structure

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Source: economic motivations for project finance (Harvard Business school)

Proposed Board Structure

Partner No. of directors

Telstra 2

AT&T 2

Japan Telecom 2

Teleglobe 2

Lending Institution 1 or 2

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Proposed Compensation Structure

Base Salary – For skills and experience

Executive Bonus – As per performance (0% to 50%)

Long term incentives – Stock options or cash rewards

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Question:

Can Take-Over Finance be used to solve the financial structure issue?

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Take Over Finance

Tripartite Arrangement between Project CompanyLender Financial Institution(FI) to fund long term infrastructure projects

FI takes over the outstanding loan from the Lender on a predetermined basis

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Advantages

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•Gets Finances for long term Projects•Need not go and search for refinancer

Project Developer

•Asset Liability Management•Frees the funds to lend to other projects

Lender

•Economic & Social Development•Faster Infrastructure Creature

Financial Institution

Our Take

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Thank You

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