Fibre Optics: High Fibre
Fibre-optic deals have been compared before now to merchant power
transactions. It's not merely a question of lack of offtake
contracts (in telecom terms no leased lines prior to financing) ?
sponsors are also putting in place an increasingly sophisticated
series of financing structures. Add to this the general ÔbuyÕ
hysteria among banks and it comes as no surprise that these
high-yield projects are becoming more attractive to investors.
But the picture has been spoilt by the decision of Southern Cross to return bank commitments to its lenders, led by ABN Amro, Barclays Capital and Deutsche Bank. Southern Cross, a trans-pacific cable venture sponsored by Optus, Telecom New Zealand, and the mega-telco Worldcom, had run up against delays in environmental permits. The project has not yet drawn down more than a quarter of the A$920 million total debt and the arrangers will hold on to their fees.
The sponsors took the decision to avoid the possibility of a technical breach and had suggested that they might finance further construction themselves. It had been suggested that Bank of America might step in to arrange, but it is more likely that the sponsors will approach the market in a more subdued fashion towards the start of next year.
No one is denying that the project itself is not a good prospect. Given the predicted surge in demand for broadband capacity in the Asia-Pacific region, and even with a clutch of nearby projects, including the Guam-Philippines cable, East Asia Crossing and Pacific Gateway Exchange, fibre-optic is a piece of the action no investor wants to be without. Marubeni recently consolidated its holdings in Global Crossing and FLAG (fibre-optic link around the globe) into a single entity, Global Bandwidth Solutions, with the objective of reaching the US capital markets more effectively.
At least part of the reason for this surge in activity is that at the moment few cable operators see themselves as in competition. Stacey Yates, from Newport, RI.-based cable analysts KMI explains: "These systems don't have to sell 100% of their capacity to break even. The general feeling is 'if you build it, they come'?. Regional networks can therefore coexist with the branches of worldwide networks such as Global Crossing.
Yet project financing remains the most effective way of funding complex, high technology projects that cannot be assembled on an incremental basis. Even Global Crossing, which recently managed to raise $3 billion on the capital markets, accepts that before its landmark AC-1 cable it was important to have non-recourse funds committed. The network had already placed a lot of faith in equity placements, and has benefited from acquisitions, such as US land network Frontier, which included the lucrative web hosting business GlobalCentre. It found that although deals tended to carry high margins, the early, and predictable, revenue streams offered by fibre networks with pre-sales contracts can impress banks.
Global Crossing's head-start makes it, at least for the time being, unlikely that that a project of its size can be repeated, although despite their ambitions even the operators were surprised by the strength of demand for their capacity. The thought that can sustain fledgling networks is that all recent networks have underestimated data demand, even if this has led to capacity being sold too cheaply.
Global Crossing's management flatly admit that they forecast too low in their expectations of demand, and other operators concede that the ratios of data to voice traffic that they included in their predictions when planning projects didnÕt reflect the Internet's exponential growth curve. It explained their increased willingness to let their next projects, Mid-Atlantic Crossing and Pacific Crossing, rely on open sales of capacity, at least until Microsoft and Softbank bought $200 million of capacity as part of their East Asia Crossing joint venture.
The prospects of a quick take-up by carriers and, in certain cases, Internet Service Providers (ISP's), can explain the move by operators to corporate sources of financing, including high-yield bonds. After overcoming the risk inherent with a sub-sea cable Global Crossing, sitting pretty with a market capitalisation of $45 billion, can afford to go to the markets, which have been very receptive, according to CFO Dan Cohrs. After the first milestones the operator can stay ahead by offering a more comprehensive, intermediary-free, package to carriers.
The wholesale carriers have little at present to fear from satellites, either. ICO and Iridium comparisons are not seen as apt by analysts simply because of the vastly different nature of their traffic: until the ?internet-in-the-sky? Teledesic comes on line orbital systems present little non-voice, broadband challenge to land-based systems, at least at the intercontinental level. So-called "last-mile" delivery systems offer more crossover potential, especially in geographically remote areas.
And fibre-optic cable technology is moving very rapidly, whether in terms of materials used or in the use of existing lengths. Dense Wave Division Multiplex (DWDM) has the potential to increase capacity tenfold simply by altering the quality of the signals carried. Even more tantalisingly, the signal conversion equipment might be eligible for QTE leasing status, either as computing or telephone switching equipment. Bank of America, current QTE market leaders, have said that they will be looking very carefully at developments in this area.
The pace of technology might still be a concern to operators, especially where they make existing installations obsolete. If Iridium has any lesson to teach to the cable market then it is that more hi-tech entrants can hit incumbents' post-construction sales. The unspoken sentiment in telecoms still appears to be get in fast, although critical mass is closest to being reached in European land-based projects where there are around 20 deals doing the rounds at the moment. One indication, at least in North America, that installations are peaking is the shift by operators to targeting smaller cities and putting in place cable leasing arrangements.
These projects' requirements differ substantially not least because, where possible, sponsors aim to lay cable along existing routes, such as rail, gas and electricity networks. Global Crossing has closed syndication on non-recourse financing for its hostile take-over of Racal Telecom, whose UK fibre-optic assets, linking major cities along rail lines, offer Global the last-mile coverage they need to provide to effectively exploit their transatlantic interests. The £675 million loan is split between a £400 million term loan and a £275 million revolving credit, lead arranged by Goldman Sachs who are, unusually, lining up joint lead arrangers and co-arrangers concurrently.
Racal's network of these rights of way (ROWs) illustrates the opportunities open to utilities, railways and generators to exploit the data boom. Racal's deal with Railtrack is one example, but there are a number of owners of ROW's that might be prepared to form their own ventures. Hermes Railtel began as a joint venture of 11 national rail companies with Global Telesystems (GTS) to string cable along their tracks. GTS restructured last year, deciding to move from acting as a portfolio investor to becoming an end-to-end service provider.
GTS has acquired a number of ISP's, including Esprit and Netsources, using their position as end-user suppliers to create an integrated operation along the lines of Global Crossing. It recently placed s500 million in senior notes, until the recent NTL offering the largest high yield in that denomination, to fund the rollout of its European network. It is also hoping to use an agreement with Bermuda-based GlobeNet to extend its reach to South America.
ROW usage is most effective, however, where the infrastructure exists- usually in just those areas where broadband wireless has yet to expand. GTS, through its interest in FLAG, may yet even have the advantage over Global Crossing through its wider presence in the Middle East. If there is a new arena where competition could arise it is in the second-tier markets. GlobeNet's Atlantica-1 cable, which links the US Eastern seaboard and the top of South America, has closed financing in the last part of this year.
The $825 million debt, lead arranged by Toronto Dominion Bank, comprises a mixture of delayed term loans and a $300 million bond placement. Margins on the loans, between 350 and 400bps, reflect the risk profile common for sub-sea cables, according to GlobeNet CFO Greg Belbeck. Draw down times are conditional on certain proportions of presales being reached, but should be reached if the potential explosive growth in South American demand forecast by GlobeNet is achieved.
Africa is another promising location for projects, particularly where privatisations are providing an impetus to investment. According to Louis Kenna, at Bank of America's Telecoms Project Finance team in London, South Africa, Ghana and Kenya are the ones to watch especially since, like South America in general, their populations are relatively concentrated near a coastline. Global Crossing hopes that a proposed circling fibre-optic ring, Africa ONE, could form part of its network, a notable turnaround after the troubled birth pangs of the ring itself.
The cable, conceived in 1993 by African members of the International Telecommunications Union (ITU), was initially sponsored AT&T submarine systems, later acquired by Tyco, who withdrew after the take-over. Resurrected as a separate entity, Africa ONE, part owned by Lucent and Columbia Technologies, it is now looking at arranging project financing to begin construction.
Morgan Stanley is believed to be involved in negotiations to arrange financing, with a formal announcement due early next year. It is likely to follow project financing lines. Global Crossing is overseeing construction on a fee basis. Despite the risks inherent in the provision of capacity on an open basis, Africa ONE believe that using Global Crossing's marketing clout and their own feasibility study, produced by T. Soja & Associates, they can make the project saleable.
?It's not clear whether all the projects out there being hyped will actually get off the ground, but there's a lot of excitement. No banker worth his salt will stay out of these exciting and, let's face it, sexy, projects? observed one sponsor. Telstra of Australia, undeterred by the Southern Cross experience, are believed to be planning a cable link to Japan, with ABN Amro acting as advisors.
The high returns are creating an interesting dilemma for the banks ? to deal or not to deal? Without enough of a track record for banks to go by, due diligence work is booming. The age of the isolated, big-ticket, sub-sea carrier project is probably passing: bandwidth prices are tumbling and operators are making sure their telecoms interests are widely spread, whether in Competitive Local Exchange Carriers, ISP's or specialist end-user services.
But the picture has been spoilt by the decision of Southern Cross to return bank commitments to its lenders, led by ABN Amro, Barclays Capital and Deutsche Bank. Southern Cross, a trans-pacific cable venture sponsored by Optus, Telecom New Zealand, and the mega-telco Worldcom, had run up against delays in environmental permits. The project has not yet drawn down more than a quarter of the A$920 million total debt and the arrangers will hold on to their fees.
The sponsors took the decision to avoid the possibility of a technical breach and had suggested that they might finance further construction themselves. It had been suggested that Bank of America might step in to arrange, but it is more likely that the sponsors will approach the market in a more subdued fashion towards the start of next year.
No one is denying that the project itself is not a good prospect. Given the predicted surge in demand for broadband capacity in the Asia-Pacific region, and even with a clutch of nearby projects, including the Guam-Philippines cable, East Asia Crossing and Pacific Gateway Exchange, fibre-optic is a piece of the action no investor wants to be without. Marubeni recently consolidated its holdings in Global Crossing and FLAG (fibre-optic link around the globe) into a single entity, Global Bandwidth Solutions, with the objective of reaching the US capital markets more effectively.
At least part of the reason for this surge in activity is that at the moment few cable operators see themselves as in competition. Stacey Yates, from Newport, RI.-based cable analysts KMI explains: "These systems don't have to sell 100% of their capacity to break even. The general feeling is 'if you build it, they come'?. Regional networks can therefore coexist with the branches of worldwide networks such as Global Crossing.
Yet project financing remains the most effective way of funding complex, high technology projects that cannot be assembled on an incremental basis. Even Global Crossing, which recently managed to raise $3 billion on the capital markets, accepts that before its landmark AC-1 cable it was important to have non-recourse funds committed. The network had already placed a lot of faith in equity placements, and has benefited from acquisitions, such as US land network Frontier, which included the lucrative web hosting business GlobalCentre. It found that although deals tended to carry high margins, the early, and predictable, revenue streams offered by fibre networks with pre-sales contracts can impress banks.
Global Crossing's head-start makes it, at least for the time being, unlikely that that a project of its size can be repeated, although despite their ambitions even the operators were surprised by the strength of demand for their capacity. The thought that can sustain fledgling networks is that all recent networks have underestimated data demand, even if this has led to capacity being sold too cheaply.
Global Crossing's management flatly admit that they forecast too low in their expectations of demand, and other operators concede that the ratios of data to voice traffic that they included in their predictions when planning projects didnÕt reflect the Internet's exponential growth curve. It explained their increased willingness to let their next projects, Mid-Atlantic Crossing and Pacific Crossing, rely on open sales of capacity, at least until Microsoft and Softbank bought $200 million of capacity as part of their East Asia Crossing joint venture.
The prospects of a quick take-up by carriers and, in certain cases, Internet Service Providers (ISP's), can explain the move by operators to corporate sources of financing, including high-yield bonds. After overcoming the risk inherent with a sub-sea cable Global Crossing, sitting pretty with a market capitalisation of $45 billion, can afford to go to the markets, which have been very receptive, according to CFO Dan Cohrs. After the first milestones the operator can stay ahead by offering a more comprehensive, intermediary-free, package to carriers.
The wholesale carriers have little at present to fear from satellites, either. ICO and Iridium comparisons are not seen as apt by analysts simply because of the vastly different nature of their traffic: until the ?internet-in-the-sky? Teledesic comes on line orbital systems present little non-voice, broadband challenge to land-based systems, at least at the intercontinental level. So-called "last-mile" delivery systems offer more crossover potential, especially in geographically remote areas.
And fibre-optic cable technology is moving very rapidly, whether in terms of materials used or in the use of existing lengths. Dense Wave Division Multiplex (DWDM) has the potential to increase capacity tenfold simply by altering the quality of the signals carried. Even more tantalisingly, the signal conversion equipment might be eligible for QTE leasing status, either as computing or telephone switching equipment. Bank of America, current QTE market leaders, have said that they will be looking very carefully at developments in this area.
The pace of technology might still be a concern to operators, especially where they make existing installations obsolete. If Iridium has any lesson to teach to the cable market then it is that more hi-tech entrants can hit incumbents' post-construction sales. The unspoken sentiment in telecoms still appears to be get in fast, although critical mass is closest to being reached in European land-based projects where there are around 20 deals doing the rounds at the moment. One indication, at least in North America, that installations are peaking is the shift by operators to targeting smaller cities and putting in place cable leasing arrangements.
These projects' requirements differ substantially not least because, where possible, sponsors aim to lay cable along existing routes, such as rail, gas and electricity networks. Global Crossing has closed syndication on non-recourse financing for its hostile take-over of Racal Telecom, whose UK fibre-optic assets, linking major cities along rail lines, offer Global the last-mile coverage they need to provide to effectively exploit their transatlantic interests. The £675 million loan is split between a £400 million term loan and a £275 million revolving credit, lead arranged by Goldman Sachs who are, unusually, lining up joint lead arrangers and co-arrangers concurrently.
Racal's network of these rights of way (ROWs) illustrates the opportunities open to utilities, railways and generators to exploit the data boom. Racal's deal with Railtrack is one example, but there are a number of owners of ROW's that might be prepared to form their own ventures. Hermes Railtel began as a joint venture of 11 national rail companies with Global Telesystems (GTS) to string cable along their tracks. GTS restructured last year, deciding to move from acting as a portfolio investor to becoming an end-to-end service provider.
GTS has acquired a number of ISP's, including Esprit and Netsources, using their position as end-user suppliers to create an integrated operation along the lines of Global Crossing. It recently placed s500 million in senior notes, until the recent NTL offering the largest high yield in that denomination, to fund the rollout of its European network. It is also hoping to use an agreement with Bermuda-based GlobeNet to extend its reach to South America.
ROW usage is most effective, however, where the infrastructure exists- usually in just those areas where broadband wireless has yet to expand. GTS, through its interest in FLAG, may yet even have the advantage over Global Crossing through its wider presence in the Middle East. If there is a new arena where competition could arise it is in the second-tier markets. GlobeNet's Atlantica-1 cable, which links the US Eastern seaboard and the top of South America, has closed financing in the last part of this year.
The $825 million debt, lead arranged by Toronto Dominion Bank, comprises a mixture of delayed term loans and a $300 million bond placement. Margins on the loans, between 350 and 400bps, reflect the risk profile common for sub-sea cables, according to GlobeNet CFO Greg Belbeck. Draw down times are conditional on certain proportions of presales being reached, but should be reached if the potential explosive growth in South American demand forecast by GlobeNet is achieved.
Africa is another promising location for projects, particularly where privatisations are providing an impetus to investment. According to Louis Kenna, at Bank of America's Telecoms Project Finance team in London, South Africa, Ghana and Kenya are the ones to watch especially since, like South America in general, their populations are relatively concentrated near a coastline. Global Crossing hopes that a proposed circling fibre-optic ring, Africa ONE, could form part of its network, a notable turnaround after the troubled birth pangs of the ring itself.
The cable, conceived in 1993 by African members of the International Telecommunications Union (ITU), was initially sponsored AT&T submarine systems, later acquired by Tyco, who withdrew after the take-over. Resurrected as a separate entity, Africa ONE, part owned by Lucent and Columbia Technologies, it is now looking at arranging project financing to begin construction.
Morgan Stanley is believed to be involved in negotiations to arrange financing, with a formal announcement due early next year. It is likely to follow project financing lines. Global Crossing is overseeing construction on a fee basis. Despite the risks inherent in the provision of capacity on an open basis, Africa ONE believe that using Global Crossing's marketing clout and their own feasibility study, produced by T. Soja & Associates, they can make the project saleable.
?It's not clear whether all the projects out there being hyped will actually get off the ground, but there's a lot of excitement. No banker worth his salt will stay out of these exciting and, let's face it, sexy, projects? observed one sponsor. Telstra of Australia, undeterred by the Southern Cross experience, are believed to be planning a cable link to Japan, with ABN Amro acting as advisors.
The high returns are creating an interesting dilemma for the banks ? to deal or not to deal? Without enough of a track record for banks to go by, due diligence work is booming. The age of the isolated, big-ticket, sub-sea carrier project is probably passing: bandwidth prices are tumbling and operators are making sure their telecoms interests are widely spread, whether in Competitive Local Exchange Carriers, ISP's or specialist end-user services.
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