The once insignificant project finance market for the telecommunications industry in Australia has been given a new lease of life by industry deregulation.

?Two years ago when we were reviewing the overall Australian project finance market we thought telecoms was irrelevant,? says one Sydney-based banker. ?Back then the market was dominated by Telstra and, to an extent, Cable & Wireless Optus, both of which wouldn't dream of doing a project financing for domestic developments,? the source explains.

But a market has been developed thanks to two key factors: the entrance of new telecoms players, and the need to develop new communications infrastructure based on the latest technology.

Depending on the definition of a telecoms project financing, four transactions have closed over the past 12 months, or are in the market now, or due to come to market by the first quarter of 2000. The four are: a project financing for Hutchison; for the Southern Cross fibre-optic cable; for the Australia to Japan fibre-optic cable; and for the fibre-optic link between Brisbane and Cairns being built by Leightons.

The largest of the four, and one which has yet to come to market, is the 640 gigabyte Japan-to-Australia cable connection estimated to cost between A$450 million and A$500 million. The three sponsors of the development are Telstra, Japan Telecom and TeleGlobe (the Canadian long-distance service provider). ABN Amro is financial adviser.

According to Steve Panizza at ABN Amro, financial close is timetabled for the first quarter. With the full financing scheme undecided, Panizza won't reveal the details of the transaction but says that the project will initially be 100% debt funded, on a non-recourse basis.

Two other large-scale telecoms transactions are possible in 2000, for relative newcomers AAPT and One Tel, both mobile telecoms service providers.

Partnered by Lucent Technologies, One Tel has plans to roll out a new GSM 1800 mobile network. ?One Tel's plan is to complete the building of its so-called GSM 1800 Phase 2+ national mobile network within five years,? says a source close to the company. The network rollout in Sydney has already begun. The total financing requirement is understood to be about A$800 million.

An AAPT deal (to build a CDMA system) looks more questionable, or at least likely to be delayed, because of Telecom New Zealand's (TCNZ) recent acquisition of more than 80% of AAPT's stock. ?Like Telstra, TCNZ is not going to want to do a project financing in Australia,? says one banker involved in the sector. Peter Clark, Australian head of project finance at Citibank/Salomon Smith Barney, disagrees: ?The project and the financing have yet to be firmed up but they are not off the agenda.?

Citibank should be close enough to the company to know ? it was involved in the first large corporate financing for AAPT, together with Chase Manhattan and ANZ. Despite the fact that TCNZ will now be the ultimate sponsor, Clark says a project financing is still possible. ?After all,? he points out, ?they planned to finance the Southern Cross cable on a project basis.? (The financing deal fell through because of delays in getting regulatory approval and eventually the link was financed on a corporate basis.) For AAPT's potential project finance deal, Chase Manhattan and Toronto Dominion are understood to be the telco's advisers.

?Those project financings that have occurred in the telecoms sector in Australia have generally followed a hybrid financing template,? says ABN Amro's Panizza. In a hybrid transaction the initial financing includes support from a credit-worthy company which is backing the development. When the project is well under way, the financing converts to a full non-recourse basis.

The A$340 million project financing for Hutchison completed in July is just such a hybrid deal. ?In the first few years of the financing there is support from parent company Hutchison Whampoa, and then the deal goes non-recourse subject to meeting several conditions,? says Clark. Citibank was the joint lead arranger in the multi-tranche deal, along with WestLB. HongkongBank, IKB and Deutsche Industrie Bank were co-arrangers.

The Hutchinson transaction has now been syndicated to 12 banks. Hutchinson will go to the stock market with its initial public offering soon. Half the proceeds from the offering will be used to reduce the project finance term debt.

But financing for the One Tel network is unlikely to follow the hybrid blueprint. ?A guarantee from One Tel wouldn't be worth the paper its written on,? says one project financier. Not because One Tel is performing badly (One Tel made a net profit of A$6 million for the full year 1998), but because of its youth, insufficient credit history and relatively shallow balance sheet. The source close to the telco speculates that One Tel's major shareholders like News Corp and Publishing and Broadcasting Limited (PBL) are unlikely to stump up the necessary guarantees to support the financing through the first few years. ?One Tel has many shareholders rather than just a few. Combined News and PBL's shareholdings are only 40% of the company's stock so there is less rationale for giving financial support,? the banker says.

With or without parent company support, bankers believe the One Tel and AAPT deals will be challenging. ?Australia is only a market of 19 million people,? says Clark. And Telstra and Hutchison are establishing CDMA networks. ?Add to those plans the AAPT and One Tel ambitions and you can see that its going to be a pretty competitive environment in mobile telephony,? says Clark. Market observers say that closing the Hutchison deal was tough enough. And in Hutchison's favour, the company has a substantially longer operating history than AAPT and One Tel.

So, although the banking sector is all but full of energy sector deals following the Victorian energy assets privatization, not all financiers are looking to telecoms to diversify. ?In the energy sector most financings have been structured for near monopolies operating in a regulated environment. On the other hand, fundraising for One Tel or AAPT will be akin to financing a merchant power station in an unregulated system,? says a local banker.

The Leighton's transaction is arguably the most interesting from a financial perspective, despite being small (between A$75 and A$80 million). Sole arranger, adviser and underwriter ABN Amro (which was involved in the innovative, A$222 million Brisbane Airport Link bond financing) have again selected a bond solution for the project because of the unusual nature of the scheme.

It is understood, although ABN Amro will not confirm, that a third party is paying for all the capacity and therefore there is no market risk. The purchaser is reported to be the future operator of the service, Vision Stream, a company created out of a former division of Telstra. Given that there is no market risk, a bond financing is relatively straightforward, allowing the project to enjoy a much longer financing tenor than would have been the case in the traditional banking markets.

The transaction is expected to come to market just before Christmas, either on the local or international capital markets. But it is unlikely to be a template deal. ?I don't think you can say that the Leightons transaction will lead to greater dependence on project finance bonds. It is a peculiar sort of deal. In almost all telecoms deals there is some element of market risk, but not here,? says a finance source.

The butt end of the market

The sudden burst of life in the telecoms market is unlikely to be long lived. However, it has come at a time when the volume of deals in other infrastructure sectors has been declining.

In the toll-way construction business the most lucrative potential routes have been done. Political considerations are also preventing greater deal flow. Queensland, New South Wales and Victoria have all elected Labour governments who are generally opposed to new toll way construction. There is one notable exception. Mid-November, the Deputy Prime Minister, John Anderson, said there was a need for federal toll roads to be upgraded and the network expanded.

A handful of other toll-way financing opportunities still exist. In the last two months the Hills motorway, otherwise known as the M2 linking central Sydney to its north-western suburbs, was refinanced. Now that traffic on the motorway has ramped up to reasonable levels, the original A$300 million financing (which included A$200 million of CPI-linked debt) has been taken out by A$470 million of bank debt. Macquarie was financial adviser in the refinancing and Commonwealth Bank of Australia and NAB were the debt providers. In addition, the sponsors of the M4 motorway from Sydney are looking at extending the road, a project that could be financed by a new project deal, says Lloyd O'Harte at Macquarie Bank.

In the rail sector, one of the largest upcoming deals is the A$700 million financing for National Express' new franchises won during the Melbourne train and trams privatization process. The transaction is due to come to market just before or just after the Christmas holidays, says a source involved in the financing.

Bankers Trust was originally adviser to National Express. Then, when BT's Australian investment banking business was bought out by Macquarie Bank, Macquarie became funding arranger. The bulk of the financing will be provided by the bond market says the source. The three selected underwriters are WestPac, Deutsche Bank and Macquarie.

Similar to toll roads, the current wave of rail privatization in Australia is nearing an end. All things being equal that will mean fewer rail project financings in the market. However, a number of large scale railway construction projects are expected to demand funding in the next two to three years.

The preferred bidder for one of the largest, the very fast train (VFT) Sydney to Canberra link, submitted its revised business proposal to government in mid-November. One of the most significant changes to the original proposal is the increased cost estimate. Originally Speed Rail, the preferred bidding consortium consisting of GEC Alsthom, Leighton Contractors and Qantas, estimated the all-in cost at A$3.5 billion. Partly because of adverse interest rate movements (a 1.5% rise in long-term rates) the cost is now estimated at A$4.8 billion, says David Roberts at ABN Amro, advisers to Speed Rail. Since the consortium has already selected its suppliers and contractors for construction, the new cost estimate is likely to stick.

The appointed group of financing banks for the VFT link has also changed. Warburg Dillon Read has been replaced by Royal Bank of Scotland which is bringing to the table Angel Trains, the UK train operating lessor. Royal Bank is joined by National Bank of Australia, Commonwealth Bank of Australia, Societe Generale, Westdeutsche Landesbank and Bank of America.

While Roberts says that a broad financing plan has been laid out, the exact details will have to wait until the government approves the proposal and signs a formal agreement with Speed Rail. The only detail at this stage is that about A$600 million is forecast to be off-balance sheet.

Roberts says the government is being asked to assist the project financially. ?We've outlined a number of options we would like the government to consider,? he says. These include a variation on the government infrastructure borrowings tax offset scheme (GIBTOS), other tax incentives and possibly a straight cash injection. ABN Amro expects government to sign an agreement with Speed Rail in April, but it will only be after another 12 to 18 months (after the Environmental Impact Study) that banks can really get down to the business of arranging the financing. Construction is expected to begin in 2002 and complete by 2006.

The Speed Rail venture is a good example of one project that has already felt the impact of the tax changes outlined in the Ralph Report into the Australian tax system. Included in the many recommendations is one that has already been taken up by the government, the removal of accelerated depreciation allowance for sales booked after September 21, when the report was made public. Since the recommendations have negated the benefits of leasing, Speed Rail has had to further adjust its financing proposal.

Up until recently, the privatization of Westrail in Western Australia seemed the most likely major rail project to be realized in 2000. However, in the past three months, the state's delicate political balance has been tipped in favour of the anti-privatization block, say project financiers. Two of the legislative council's independent politicians, who hold the balance of power, have declared their opposition to privatization legislation. That means that neither the Westrail nor Alinta Gas assets are likely now to be sold off until new state elections. Previously, Westrail's assets had been expected to be sold off through a trade sale, which was expected to raise between A$800 million and A$1 billion.