Japan: AJC walks then runs
Submarine cable developments are among the most bankable projects
and the recently closed financing for Australia Japan Cable Limited
(AJC) was no exception. ?The financing almost seemed to walk out of
the door it was so popular,? says a source at one of the banks
arranging the transaction.
The total $518.4 million transaction ($566.7 including delay provisioning) funds a 640 gigabyte direct fiber optic link between eastern Australia and Japan with interconnectivity to the US via a diversified range of cable connections in Guam and Japan, as well as with other Asian cable systems.
In July, Project Finance reported that the Australia Japan Cable (AJC) deal was expected to set a number of new precedents in terms of structure and pricing ? so it has turned out.
Pricing on the $159.1 million market risk tranche ended up being significantly below market expectation at 135 basis points. Previous submarine fiber optic cable deals, by comparison, have hovered between 175 basis points and 200 basis points for the market risk tranche.
The bankers involved cite a range of factors to explain the new pricing low, namely the strong sponsor group, the high pre-sales amounts, close attention to permitting risks and banking appetite for telecommunications assets.
Project Sponsors are Telstra, holding 39.9% of the equity, Teleglobe Inc (15.0%), MCI WorldCom Global Networks (15.0%), Concert Global Network Services (10.1%), Japan Telecom (10.0%) and NTT Communications Corp (10.0%). ?None of these companies can really be called straight-up investors,? says a financier previously involved in the deal, ?everyone, even Teleglobe, has a vested, strategic interest in the development.?
In addition to the pricing precedent, past submarine cable project financings have all included a cash flow sharing mechanism whereby mandatory pre-payments are made if the cable, once running commercially, is performing better than expected. Traditionally these mandatory pre-payments have been equivalent to 50% of the surplus above the expected revenue targets. A second banker involved in the AJC deal says that this precedent has also been broken in favour of the sponsors, although he does not reveal whether the mandatory payments level has been set at a lower percentage of the surplus or whether mandatory pre-payments have been scrapped entirely.
In light of the difficulties Southern Cross faced in attaining the necessary permits, another noteworthy feature of the AJC project was the level of attention paid to the permitting issue. ?For the first time, there is a specific and detailed mechanism in the document to deal with failure to obtain the necessary permits,? says Stephen Panizza, vice-president at ABN Amro in Singapore. ?There is a delay reserve, a clear process the project has to go through before banks can claim a default,? he adds.
The delay contingency primarily covers increased interest costs if construction is delayed through to the lenders' sunset date, of 30 September 2002 (i.e. twelve months beyond the expected ready for service date).
David Balint, senior manager at ANZ structured finance, says the mechanism permits AJC Limited to continue to fund construction and other project costs, while the event causing the delay is addressed and remedied. Lenders' interests are protected via mechanisms including supporting information by appropriate specialist consultant that AJCL's work around plans are appropriate.
AJC is of particular importance to Telstra, indicated by that that Telstra is the project's largest shareholder. ?Existing international cable links to Australia are nearing their capacity limits due to the huge growth in internet traffic at the same time AJC provides cost effective access to north Asia,? says a source in Telstra's finance department. The source adds AJC's capacity can be expanded between two and three hundred percent with the addition of new multiplexes to the landed asset, at a cost far less than that necessary to finance a totally new cable.
However, because AJC is a collapsed loop system with branch protection and is not comprised of so called ?self-healing architecture,? and because there is not enough restoration capacity to deal with a failure of the cable, another high capacity restoration cable will be necessary, says one banker. It is expected that this new cable will run through across the Pacific.
For the record the four joint lead arrangers were ANZ (documentation and facility agent), IBJ Australia (technical report), Toronto-Dominion Bank (syndication bookrunner and market report), and Westdeutsche Landesbank (modeling, insurance, tax and accounting). Co-arrangers were Dai-Ichi Kangyo Bank and Westpac Banking. CBA-CLA, National Australia Bank and HypoVereinsbank were lead managers. Credit Agricole Indosuez Australia and Manager Sumitomo International Finance and Bank of Tokyo-Mitsubishi acted as managers. ABN Amro was the financial advisor.
Upfront fees to the lead manages were 30 bps for tranche A and 50 bps for tranche B. For managers upfront fees for tranche A and B were 25 bps and 45 bps respectively. Margins for tranche A are 0.55% per annum and for tranche B are 1.30% per annum. Commitment fees are 0.25% for tranche A and 0.50% for tranche B.
The total $518.4 million transaction ($566.7 including delay provisioning) funds a 640 gigabyte direct fiber optic link between eastern Australia and Japan with interconnectivity to the US via a diversified range of cable connections in Guam and Japan, as well as with other Asian cable systems.
In July, Project Finance reported that the Australia Japan Cable (AJC) deal was expected to set a number of new precedents in terms of structure and pricing ? so it has turned out.
Pricing on the $159.1 million market risk tranche ended up being significantly below market expectation at 135 basis points. Previous submarine fiber optic cable deals, by comparison, have hovered between 175 basis points and 200 basis points for the market risk tranche.
The bankers involved cite a range of factors to explain the new pricing low, namely the strong sponsor group, the high pre-sales amounts, close attention to permitting risks and banking appetite for telecommunications assets.
Project Sponsors are Telstra, holding 39.9% of the equity, Teleglobe Inc (15.0%), MCI WorldCom Global Networks (15.0%), Concert Global Network Services (10.1%), Japan Telecom (10.0%) and NTT Communications Corp (10.0%). ?None of these companies can really be called straight-up investors,? says a financier previously involved in the deal, ?everyone, even Teleglobe, has a vested, strategic interest in the development.?
In addition to the pricing precedent, past submarine cable project financings have all included a cash flow sharing mechanism whereby mandatory pre-payments are made if the cable, once running commercially, is performing better than expected. Traditionally these mandatory pre-payments have been equivalent to 50% of the surplus above the expected revenue targets. A second banker involved in the AJC deal says that this precedent has also been broken in favour of the sponsors, although he does not reveal whether the mandatory payments level has been set at a lower percentage of the surplus or whether mandatory pre-payments have been scrapped entirely.
In light of the difficulties Southern Cross faced in attaining the necessary permits, another noteworthy feature of the AJC project was the level of attention paid to the permitting issue. ?For the first time, there is a specific and detailed mechanism in the document to deal with failure to obtain the necessary permits,? says Stephen Panizza, vice-president at ABN Amro in Singapore. ?There is a delay reserve, a clear process the project has to go through before banks can claim a default,? he adds.
The delay contingency primarily covers increased interest costs if construction is delayed through to the lenders' sunset date, of 30 September 2002 (i.e. twelve months beyond the expected ready for service date).
David Balint, senior manager at ANZ structured finance, says the mechanism permits AJC Limited to continue to fund construction and other project costs, while the event causing the delay is addressed and remedied. Lenders' interests are protected via mechanisms including supporting information by appropriate specialist consultant that AJCL's work around plans are appropriate.
AJC is of particular importance to Telstra, indicated by that that Telstra is the project's largest shareholder. ?Existing international cable links to Australia are nearing their capacity limits due to the huge growth in internet traffic at the same time AJC provides cost effective access to north Asia,? says a source in Telstra's finance department. The source adds AJC's capacity can be expanded between two and three hundred percent with the addition of new multiplexes to the landed asset, at a cost far less than that necessary to finance a totally new cable.
However, because AJC is a collapsed loop system with branch protection and is not comprised of so called ?self-healing architecture,? and because there is not enough restoration capacity to deal with a failure of the cable, another high capacity restoration cable will be necessary, says one banker. It is expected that this new cable will run through across the Pacific.
For the record the four joint lead arrangers were ANZ (documentation and facility agent), IBJ Australia (technical report), Toronto-Dominion Bank (syndication bookrunner and market report), and Westdeutsche Landesbank (modeling, insurance, tax and accounting). Co-arrangers were Dai-Ichi Kangyo Bank and Westpac Banking. CBA-CLA, National Australia Bank and HypoVereinsbank were lead managers. Credit Agricole Indosuez Australia and Manager Sumitomo International Finance and Bank of Tokyo-Mitsubishi acted as managers. ABN Amro was the financial advisor.
Upfront fees to the lead manages were 30 bps for tranche A and 50 bps for tranche B. For managers upfront fees for tranche A and B were 25 bps and 45 bps respectively. Margins for tranche A are 0.55% per annum and for tranche B are 1.30% per annum. Commitment fees are 0.25% for tranche A and 0.50% for tranche B.
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