SEACOM: Boldly broadband

The $600 million SEACOM international fibre-optic cable project closed in November 2007, and was the first to close of a flurry of similar projects in the region. It is the only one of three that have reached market to be entirely privately financed, and though it employed minimal debt, benefited from attractive pricing.

The project involves the construction of a 15,000km cable, directly connecting Mtunzini in South Africa to Mumbai in India, via Marseille in France, Egypt, Mozambique, Madagascar, Kenya and Tanzania. The cable will have a capacity of 1.28TB per second, providing broadband services to Africa's eastern seaboard, as an alternative to existing satellite solutions.

SEACOM will enable faster internet access, high definition TV capability, and service to PDA and mobile devices in the region. The 2010 football World Cup in is to be held in South Africa, a factor that has contributed to the 2009 deadline for completion, as the greater broadband capacity will need to be place to carry international television transmissions.

The sponsors are a subsidiary of the Aga Khan Fund for Economc Development, Industrial Promotion Services, with a 25% equity interest, Venfin (also providing 25%), Herakles Telecom (25%), Convergence Partners (12.5%), and the Shanduka Group (12.5%). The equity contribution is predominantly South African, with the exceptions of Venfin's (Kenya) and Herakles' (US) commitments. Herakles affiliate Sithe Global is a co-sponsor, with IPS, of the Bujagali hydro project, which has been recognised elsewhere this issue.

The project featured minimal debt financing, at only $75 million, or 12.5% of the total cost. The rest of the project was financed with $525 million in equity. SEACOM invested a significant amount of capital in the engineering work and marine survey requirements before financial close, and began construction in the first week of December 2007, with supplier Tyco Telecommunications. These soft contributions, which could total as much as $50 million, have not been included in the total cost of the project.

Nedbank Capital was mandated lead arranger on the financing, and brought in Investec as joint underwriter two months before financial close. The two banks split the debt 50/50. The Investec portion was split between its South Africa office, which funded in Rand, and the remainder from its Mauritius office, which funded in US dollars. The SEACOM special purpose vehicle is domiciled in Mauritius.

The debt, which has a margin of 200bp over Libor, has a seven-year maturity, including a two-year draw-down period, and a five-year mortgage-style amortisation structure featuring identical semi-annual payments.

The 200bp pricing is impressive from the sponsor perspective, especially considering that the sponsors only pre-sold 5% of the cable's capacity before financial close. The cable will have a massive capacity, of 1.28TB per second, however, so 5% still accounts for a substantial amount of capacity. These users, moreover, include MTC subsidiary CelTel, South Africa's MTN and Neotel, in which Tata has a substantial stake. The growth that these operators have enjoyed is meant to presage the growth in capacity usage on SEACOM.

According to Brian Herlihy, CEO of SEACOM, the presales are of indefeasible rights of use (IRU) contracts, with terms of between 15 and 20 years. There are a number of reasons for the small ratio of debt to equity. Herlihy says that, having worked on the Bujagali financing (see African Power Deal of the Year 2007, this issue), he saw the benefits of using project financing in the SEACOM deal, but already had enough equity in place to finance the whole project.

Moreover, because so little of the total capacity was sold at that financial close, Herlihy believes that banks would not have had greater appetite at reasonable enough pricing levels. However, Nedbank and then Investec were prepared to fund based on the small level of commitments at presale, and are likely to refinance once more capacity is sold. Herlihy estimates that this refinancing could take place within 18 months.

The debt element also covered for the departure of one European-based investor, although commitments from the other shareholders would have been sufficient to cover this. SEACOM will still need to find users to light up the remaining dark fibre before trying to achieve higher amounts of leverage

Robert Gecelter, in Investec's project finance group, explained that the timeframe to close the deal was limited, in order to minimise the impact of competing projects, such as the EASSy cable project, which closed within weeks of SEACOM. He says, "the financing was conducted in the private sector, so it moved more quickly". The EASSy deal involved significant multilateral involvement and an unwieldy group of incumbent telecoms operators, and moved more slowly, although both projects had been in development for a number of years

Gecelter also notes that the SEACOM cable has certain advantages over its competition. It connects Africa to Europe directly whereas, for instance, the EASSy cable will need extensions or link-ups with other cables as it stops in Sudan, and is not connected to Europe.

As none of the equity investors in SEACOM is a broadband service provider in the region, the cable will provide equal and open access, whereby any provider will be entitled to take capacity, provided it adheres to technical regulations. This provision is unique in the region, as the other cables have some degree of incumbent telco equity sponsorship.

The immense amount of capacity that this cable will provide to the region is considered by the investors and the banks to be speculative. The entire capacity is not expected to be needed immediately, but unlike the broadband providers that went bust in the late 1990s, the SEACOM cable and its competitors are providing a service to a region where previously there was practically none. Mobile operators in Africa have made impressive profits against a similar backdrop. Its sponsors hope that this standing start turns into a similar commercial advantage.

SEACOM
Size: $650 million
Description: 15,000km, 1.28TB/second fibre-optic broadband cable
Debt: $75 million
Equity: $575 million
Sponsors: Industrial Promotion Services, Venfin Limited, Herakles Telecom, Convergence Partners, and the Shanduka Group
Mandated lead arrangers: Nedbank Capital, Investec Bank
Lender legal: Herbert Smith and Bell Dewar
Borrower legal: Hunton & Williams
Sponsor legal: White & Case, Marita and Hofmeyr Herbstein & Gihwala
Cable contractor: Tyco Telecommunications
Backhaul provider: Neotel