Southern Cross: paying dividends
General syndication of the $950 million, five-year facility for
Southern Cross Cable Network closed oversubscribed last month,
despite the lukewarm interest in the banking market for telecoms
deals of all shapes and sizes at the present time.
The financing was led by ANZ Investment Bank and Barclays Capital and takes out previous equity and bridge funding for the project.
The Southern Cross venture gained notoriety three years ago when a delay in securing environmental permits forced the sponsors to cancel a A$920 ($460 million) project financing to fund the cable roll-out before a quarter of the debt had been drawn down. A $640 million bridging facility was later drawn up to finance Southern during the construction phase, but according to Richard Palmer, at Barclays Sydney, the sponsors used less than the full amount of the facility. ?Most of the funds put into the project to date have been shareholder funds,? he adds.
Chris Tompkin, of ANZ's Melbourne-based project finance team, says this time around the financing has been sold to the market at a point when the basic development was largely complete. Southern Cross has plans to expand the cable system but the proceeds from the financing will be used primarily to maintain and operate the cable network and to pay a dividend to shareholders. Originally designed to deliver 120 Gigabits per second of fully protected capacity, Southern Cross will be upgraded to 240 during 2002, with the potential to increase total protected network capacity to 480 Gbit per second at a future date.
15 banks joined the general syndication when it closed on April 20. As a result, cutbacks had to be made to the allocations for the sub-underwriters, lead arrangers and general syndication participants.
The response from the banking market, at a time of concern for the financial health of the telecom sector globally, was partly a reflection of strong sponsor support and the fact that the financing features no permitting or significant construction risk.
However, the three sponsors, Telecom NZ, Cable & Wireless Optus and MCI WorldCom did end up paying more for their funds than the sponsors of the closest equivalent project - the Australia Japan Cable (AJC) scheme which closed mid-2000 - despite the fact AJC, unlike Southern Cross, still had to contend with both permitting and construction risk.
Notably, pricing for Southern's Cross' $212.3 million market risk ?B' tranche came in at 145 basis points over Libor. Pricing on AJC's $159.1 million market risk tranche ended up at 135 basis points over ? although AJC's pricing was significantly below market expectation.
Pricing for submarine fiber-optic cable deals prior to AJC, have hovered at between 175 basis points and 200 basis points over Libor on the market risk tranche.
Part of the reason for the higher pricing in the Southern Cross deal, says one of the participants, is the fact that funds are being used partly to pay dividends to shareholders, an unusual use for the cash which had several banks grumbling. Palmer, however, defends the dividend payment: ?its been a highly successful project to date. The sponsors sunk a significant amount of their own equity into the venture and the market value of Southern Cross now is many multiples of the cables' original construction cost.?
And then there is the size differential. The total financing amount for AJC was less than $570 million compared with the total $950 million syndicated loan for Southern Cross. ?AJC's sponsors could rely more on their relationship banks,? says one banker, adding, ?Southern Cross had to attract a more marginal investor and that demanded a larger incentive.?
The Southern Cross financing was split between the market risk tranche and a $737.7 million A tranche on investment grade pre-sales contracts. ?Tranche B does feature a large volume of pre-sales contracts but they are below investment grade,? says ANZ's Tompkin.
Southern Cross managed to secure capacity sales of over $1.6 billion by February, according to sources close to the company.
This deal wraps up Southern Cross's financing needs for the foreseeable future.
The Southern Cross Cable Network was built with the intention of removing the bandwidth bottleneck between Australasia and the United States. Southern Cross now has the potential to provide for Australasia's bandwidth requirements for the next five years by adopting a new higher-capacity Dense Wave Division Multiplexing (DWDM) technology that is four times faster than that currently being used. Once DWDM is installed Southern Cross will be capable of delivering 480 times the capacity of the existing link between Australasia and North America via the Pacific Rim system.
The 30,500 km long cable route from Australia to New Zealand and Hawaii to the west coast of the US, returning to Australia through Fiji.
The cable network's second Hawaii-mainland US link entered service on 4 March, completing the massive loop.
Ironically, when the first Southern Cross financing closed in 1998 it was an even more obvious success than the present deal. A total of 22 banks joined the nine arrangers and co-arrangers of the deal during syndication, who combined were offering to finance an amount five times more than the scheduled amount.
Southern Cross
Financing amount: $950m
Lead arrangers: ANZ Investment Bank, Barclays Capital
Sponsors: Telecom NZ (50%), Cable & Wireless Optus (40%), MCI WorldCom (10%).
Core suppliers: Alcatel and Fujitsu.
Joint underwriters: DKB Australia, Westpac, Toronto-Dominion Australia, Sumitomo International Finance Australia, National Australia Bank, Citigroup Australia, BNP Paribas.
Tranche ?A'
Size: $737.7m
Type: Five year, project financing, repayment on base case in 3 years time
Margin: 85bp over Libor
Tranche ?B'
Size: $212.3m
Margin: 145bp over Libor
Lawyers: Banks ? Clayton Utz, Simpson Thatcher Bartlett
The financing was led by ANZ Investment Bank and Barclays Capital and takes out previous equity and bridge funding for the project.
The Southern Cross venture gained notoriety three years ago when a delay in securing environmental permits forced the sponsors to cancel a A$920 ($460 million) project financing to fund the cable roll-out before a quarter of the debt had been drawn down. A $640 million bridging facility was later drawn up to finance Southern during the construction phase, but according to Richard Palmer, at Barclays Sydney, the sponsors used less than the full amount of the facility. ?Most of the funds put into the project to date have been shareholder funds,? he adds.
Chris Tompkin, of ANZ's Melbourne-based project finance team, says this time around the financing has been sold to the market at a point when the basic development was largely complete. Southern Cross has plans to expand the cable system but the proceeds from the financing will be used primarily to maintain and operate the cable network and to pay a dividend to shareholders. Originally designed to deliver 120 Gigabits per second of fully protected capacity, Southern Cross will be upgraded to 240 during 2002, with the potential to increase total protected network capacity to 480 Gbit per second at a future date.
15 banks joined the general syndication when it closed on April 20. As a result, cutbacks had to be made to the allocations for the sub-underwriters, lead arrangers and general syndication participants.
The response from the banking market, at a time of concern for the financial health of the telecom sector globally, was partly a reflection of strong sponsor support and the fact that the financing features no permitting or significant construction risk.
However, the three sponsors, Telecom NZ, Cable & Wireless Optus and MCI WorldCom did end up paying more for their funds than the sponsors of the closest equivalent project - the Australia Japan Cable (AJC) scheme which closed mid-2000 - despite the fact AJC, unlike Southern Cross, still had to contend with both permitting and construction risk.
Notably, pricing for Southern's Cross' $212.3 million market risk ?B' tranche came in at 145 basis points over Libor. Pricing on AJC's $159.1 million market risk tranche ended up at 135 basis points over ? although AJC's pricing was significantly below market expectation.
Pricing for submarine fiber-optic cable deals prior to AJC, have hovered at between 175 basis points and 200 basis points over Libor on the market risk tranche.
Part of the reason for the higher pricing in the Southern Cross deal, says one of the participants, is the fact that funds are being used partly to pay dividends to shareholders, an unusual use for the cash which had several banks grumbling. Palmer, however, defends the dividend payment: ?its been a highly successful project to date. The sponsors sunk a significant amount of their own equity into the venture and the market value of Southern Cross now is many multiples of the cables' original construction cost.?
And then there is the size differential. The total financing amount for AJC was less than $570 million compared with the total $950 million syndicated loan for Southern Cross. ?AJC's sponsors could rely more on their relationship banks,? says one banker, adding, ?Southern Cross had to attract a more marginal investor and that demanded a larger incentive.?
The Southern Cross financing was split between the market risk tranche and a $737.7 million A tranche on investment grade pre-sales contracts. ?Tranche B does feature a large volume of pre-sales contracts but they are below investment grade,? says ANZ's Tompkin.
Southern Cross managed to secure capacity sales of over $1.6 billion by February, according to sources close to the company.
This deal wraps up Southern Cross's financing needs for the foreseeable future.
The Southern Cross Cable Network was built with the intention of removing the bandwidth bottleneck between Australasia and the United States. Southern Cross now has the potential to provide for Australasia's bandwidth requirements for the next five years by adopting a new higher-capacity Dense Wave Division Multiplexing (DWDM) technology that is four times faster than that currently being used. Once DWDM is installed Southern Cross will be capable of delivering 480 times the capacity of the existing link between Australasia and North America via the Pacific Rim system.
The 30,500 km long cable route from Australia to New Zealand and Hawaii to the west coast of the US, returning to Australia through Fiji.
The cable network's second Hawaii-mainland US link entered service on 4 March, completing the massive loop.
Ironically, when the first Southern Cross financing closed in 1998 it was an even more obvious success than the present deal. A total of 22 banks joined the nine arrangers and co-arrangers of the deal during syndication, who combined were offering to finance an amount five times more than the scheduled amount.
Southern Cross
Financing amount: $950m
Lead arrangers: ANZ Investment Bank, Barclays Capital
Sponsors: Telecom NZ (50%), Cable & Wireless Optus (40%), MCI WorldCom (10%).
Core suppliers: Alcatel and Fujitsu.
Joint underwriters: DKB Australia, Westpac, Toronto-Dominion Australia, Sumitomo International Finance Australia, National Australia Bank, Citigroup Australia, BNP Paribas.
Tranche ?A'
Size: $737.7m
Type: Five year, project financing, repayment on base case in 3 years time
Margin: 85bp over Libor
Tranche ?B'
Size: $212.3m
Margin: 145bp over Libor
Lawyers: Banks ? Clayton Utz, Simpson Thatcher Bartlett
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