Two financings for similar African and international fibre-optic cable projects closed in November 2007, with a third deal set to come to market shortly. Most of them have been in the planning stage for several years, but by nearing completion so close together, threaten a glut in an historically underserved region.

The projects aim to enable faster internet access, high definition TV capability, and service to PDA and mobile devices in the region. The sponsors of both projects have referenced the 2010 football World Cup in South Africa, which will require greater broadband capacity to be in place for international television transmission.

Despite similarities between the two projects, their financings are notably different, employing high equity contribution and minimal bank debt in one case, and significant multilateral debt financing and a greater number of independent investors in the other. In both cases, much of the equity is African.

The first of the deals to close was the $650 million SEACOM project, which involves the construction of a 15,000km cable connecting Mtunzini in South Africa to Mumbai in India, via Marseille in France, Egypt, Mozambique, Madagascar, Kenya and Tanzania.

The financing for the SEACOM project features only $75 million of debt, or 11.5% of the project's total cost, but $575 million in equity. The debt financing was arranged by Nedbank Capital and Investec Bank in South Africa, has a five-year maturity, and is features a mortgage-style amortisation structure.

The sponsors are an AFKED subsidiary, 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 the Venfin (Kenya) and Herakles (US) commitments.

The sponsor only decided to add a debt tranche to slightly increase investor returns. The project was not more highly levered because the borrower did not want to scale back the equity commitments it already had, despite recognising the cost benefits of the debt.

The cable will have a capacity of 1.28 TB per second, providing broadband services to Africa's eastern seaboard, as an alternative to existing satellite solutions. SEACOM invested approximately $10 million 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. Its estimated date for operation is 2009.

The other fibre-optic project to close, within weeks of the first deal, is the $235 million East African Submarine Cable System (EASSy). The project's financial close was delayed because of access, ownership and financing issues.

The proportion of debt to equity for this project is also relatively low, at 30% of the project's total cost. The $70.7 million in debt is provided by five multilateral agencies, including an $18.2 million tranche provided by the IFC, and $14.5 million from the African Development Bank (AfDB). The French Development Agency (AFD), the European Investment Bank (EIB), and the KfW are also providing debt tranches.

The EASSy SPV is the West Indian Ocean Cable Company (WIOCC), which includes 25 telecommunications operators as sponsors, 21 of which are African. The sponsors are providing the remaining 70% of the project's cost in equity. Alcatel-Lucent is supplying the equipment and construction.

The cable will run for 10,000km from Africa's southern tip to the Horn of Africa. A further 13 adjoining countries will be linked into the system through a terrestrial backbone network. This backbone will be funded through a separate World Bank initiative.

The cable will operate at 20GB per second, with a capacity of up to 320GB per second after the project has been upgraded. The sponsors estimate that the EASSy cable will reduce the cost of internet access and connectivity by 65% upon completion of the project, and that the number of broadband subscribers in the region will increase threefold. Competition between the service providers, and also from the SEACOM cable, will also reduce the costs of connectivity.

Following the close of the SEACOM and EASSy, a third African fibre-optic project has been awarded to a Kenyan consortium, East Africa Marine System (TEAMS), also in conjunction with Alcatel-Lucent.

The award for the $82 million contract, which involves installing a 4,900km under-sea cable linking the port of Mombassa in Kenya, to Fujairah in the UAE, was announced in the second week of December 2007. The construction time frame is similar to the two larger projects, with completion also expected in the first quarter of 2009. The cable will initially provide bandwidth of 40GB per second, to be upgraded to 640GB per second later.

Kenya is the largest of the East African economies, and its government is to hold a 20% interest in the proposed project which, to date, does not have any debt financing planned. Estilat, in Abu Dhabi, is providing 15% of the project's cost in equity, with the remaining 65% to be open to bids for investments from the other affected countries in the first instance, and to Kenyan investors thereafter.

The three cables feature high levels of equity because of the uncertainty surround ing how host economies will respond to such a huge increase in bandwidth. The lesson of the collapse of the fibre-optic boom of the late 1990s was that capacity eventually gets filled, but not always in a timeframe that satisfies debt investors. The hugely conservative capital structures of the two projects highlight uncertainties over future usage, as well as the huge size of the consortiums concerned, and the lessons of the last bust.

SEACOM

Size: $650 million

Description: 15,000km fibre-optic broadband cable

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 and Hofmeyr Herbstein & Gihwala

EASSy

Size: $235 million

Description: 10,000km fibre-optic broadband cable

Sponsors: Consortium of 25 telecoms providers

Debt: $70.7 million

Mandated lead arrangers: IFC, AfDB, AFD, EIB, KfW