Syndication closed in December on the $1.2 billion FLAG Atlantic-1 (FA-1) cable system, lead arranged by Barclays Capital. Atlantic-1 is a 50:50 joint venture between GTS Holdings (a subsidiary of Global TeleSystems) and FLAG Telecom. GTS runs a European backbone network and owns a number of regional Internet Service Providers (ISPs), including the former Hermes Railtel network. FLAG is the independent operator of an existing global fibre-optic network that sells its capacity to carriers, resellers and ISPs.

The sponsors provided some $100 million of equity each for the cable, which links Manhattan and Newark, NJ, on the east of the US with landing points in Brittany, France, and Cornwall in the UK. The cable consists of three self-healing cable loops with a capacity of 2.4 Terabits, doubled in October from the planned 1.2 Terabits.

The financing has been split between a $575 million construction loan, with a tenor of 7.5 years and pricing at 300bps over Libor, and a $25 million revolver with the same tenor and pricing. An equally significant element of the deal was provided by the presales contracts for cable capacity. Disclosed customers include Teleglobe, Telecom Malaysia, Worldstar and Singapore Telecom.

Barclays Capital syndicated the debt on both sides of the Atlantic in a relatively short time-frame. The firm received responses from 19 banks, described as mostly European project finance lenders, and are proud of how the process went, given the state of the market and the unwillingness of many banks to put more on their books so close to year end.

FA-1 forms part of the context of increasing demand for connectivity in the telecoms market, with GTS' substantial interests in Europe providing at least part of the incentive. Customers form a rough spread of American, European and Far Eastern operators, who can connect at telehousing facilities in London and Paris. GTS has bought a fibre pair, one of a total of six, on the network for an undisclosed amount.

Another significant development is the recent FCC ruling in the US, which has allowed Bell Atlantic to market long-distance connectivity in New York State, effectively ending AT&T's monopoly there. Although AT&T appealed for, and was denied, a stay in the service launch, the spectre is looming of even greater competition between carriers on the US mainland. Alliances with ISPs make the relative attractiveness of carriers even more difficult to ascertain, even given the proven potential for growth in data traffic.

It is this growth that is largely keeping bank appetite for cable deals alive, especially given the burgeoning increase in capacity supply. The market for these deals has been slowing since 1997-8, even before the buy-back of the Southern Cross cable's debt, following permit hiccups. FA-1, operating in a more mature region for subsea cable projects, has still had to convince investors that the route for the cable has minimised any conflicts with obstacles such as existing cables or fishing zones.

Both permit issues and increasing competition look set to alter the market for these kinds of deals, and sponsors are likely to have to shoulder the construction risk from the start. As Peter Yetman, director in Barclays Capital's telecoms group in New York, explains: "Future deals are likely to be structured to ensure that issues regarding permits and landing rights are equity risks. This said, it is still perceived that the construction risk in these projects is manageable."

The equipment for the sub-sea sections 12,500km cable is being supplied by Alcatel Submarine Networks on a turnkey basis, a contract which takes up most of the project's cost. Alcatel had been working on squeezing a greater number of wavelengths (and therefore capacity) onto existing equipment. It was this event that increased the cost of the project by about $100 million, and led to the restructuring that brought Dresdner Kleinwort Benson and West LB in as co-arrangers. These advances make the likelihood that FLAG can offer competitive rates higher - but competition in the Atlantic is still hotting up.

Aside from the dynamic Global Crossing network, the end of 1999 also saw a new entrant into the transatlantic cable market. Worldwide Fiber, a wholly owned subsidiary of the Ledcor construction company, is hoping to build a cable connecting Boston, Halifax, Dublin and Liverpool, with operation scheduled to start in 2001. The $600 million financing for the cable, named Hibernia, was in the market at the same time as FA-1, and had behind it the powerful figure of the ex-Microsoft CFO Greg Maffei, now ensconced at Worldwide Fiber.

Barclays can feel happy with the one-in-three strike rate they got at syndication, given the tribulations at Hibernia and the earlier, ultimately successful, struggle to bring the Globenet cable to close. There was a rough overlap with the institutions approached by Hibernia, although the latter was pitched more as a domestic telecoms prospect. In this case, at least, project financing structures have been a positive boon to selling such a substantial undertaking. As Jonathan Burn, director in syndications at Barclays Capital puts it: "The markets are a lot more savvy now about what they are looking at."

With this escalating competitive environment it is unlikely that the element of presales in deals can be decreased. Enron has recently started to involve itself in the trading of capacity as a commodity, with the possibility of using forwards and other contracts, heightening the flexibility for purchasers. Presales also generally fetch lower prices than post-completion purchases, even if they are vital to getting financing in place.

Yetman believes that, along with the quality of the sponsors, presales are still a major selling point for the banks: "Given the increasing competition in the market, presales will remain one of the key components." All of the expected growth areas, in particular South America and Asia-Pacific, have more than one cable project underway, making 100% market risk deals unlikely. Bankers and sponsors need to keep hoping that data demand keeps exceeding growth predictions to keep cables viable and ahead of other technological alternatives.

In this dynamic market the rules are changing fast, especially if, as has been predicted, alliances with ISP's and their ready access to the equities markets give some operators a leading edge. It all adds up to uncertainty for project lenders. Says Yetman: "Credit terms and pricing of bank financing is having to be adjusted to take account of these changes, with financings not necessarily becoming easier".

Project financing may even make a re-entry into the armoury of expansion-hungry carriers. More and more of them will struggle to remain investment grade and will be forced to act less aggressively. In this context, the tightly structured deals that are project finance's staple may make a welcome return.