Australia Japan Cable

Structuring the Project finance 1

Submitted by: Swetha Avula Anirudh Baliyan Prince Behl Raunak Bhagwat Prachi Bhandari Mayank Bhatia SVKM's NMIMS University

Question: 2

What potential problems could arise that would prevent capital providers to earn returns on their invested capital?

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Market Risk – Demand uncertainty 3 Exhibit 5 Australia Demand and Supply for Capacity (Gigabits) 1999E

2000E

2001E

2002E

2003E

2004E

2005E

27

27

27

27

27

27

27

Southern Cross Cable

0

120

120

120

120

120

120

SEA-ME-WE3 Upgrade

0

20

20

20

20

20

20

27

167

167

167

167

167

167

10

25

63

129

209

320

470

Existing Capacity

Total Existing & Planned Capacity Forecast Demand Source: Company documents.

 Wastage of unused capacity or excess capacity supply

by competitors  Mitigation Strategy: Pre-sales capacity contracts SVKM's NMIMS University

Market Risk – Price Volatility 4 Exhibit 3 Impact of Declining Prices on the Present Value of Revenue

Annual Rate of Price Declines 0% 10% 20% 30% 40% 50%

Cumulative Present Value of Revenue as Percent of Total 10-Year Revenue (by Year) Year 1 Year 3 Year 5 15% 21% 28% 37% 46% 55%

40% 52% 64% 75% 84% 91%

62% 73% 83% 91% 95% 98%

Year 7 79% 87% 93% 97% 99% 100%

Source: Casewriter analysis.

 Higher the annual price decline, lesser the time period of cash

flows generated  Mitigation Strategy: Hedging strategy (Forward Contract) SVKM's NMIMS University

Technological Risk 5

 Access to cheaper and better technology  Mitigation : Co-opetation  Launching the cable system quickly  Upgrading the existing technology 

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Completion Delays 6

 Due to Equipment supply delay  Mitigation: Signing supply contracts, selecting credit worthy and well known suppliers

 Due to unavailability of cable ships to install cables

and repeaters and for further maintenance 

Mitigation: Book cable ships in advance

 Due to access to landing stations, right-of-way

permits 

Mitigation: Landing party agreements – shared ownership with landing station owners

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7

 Sovereign Risk : Changes in government policies  Mitigation: Higher leverage from various lending institutions  Hold Up Risk:  Enter into long term contracts for Landing stations  Operational Risk: Cable failures due to shipping,

dredging and fishing activities 

Mitigation: Hiring cable ship companies with high expertise level in maintenance

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 Question : 8

What are your recommendations in terms of:  Ownership structure  Capital structure  Organization structure  Board structure  Management compensation?

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Number of sponsors in Project Finance 9

Source: economic motivations for project finance (Harvard Business school) SVKM's NMIMS University

Proposed Ownership structure 10

Sponsors/Partners

Shareholding

Asset to table

Telstra

40%

Major sponsor

AT&T

15%

Landing Station

Japan Telecom

15%

Landing Station

NTT

20%

Landing Station + Capacity

Teleglobe

10%

Capacity

Need to have good equity contribution to avoid “Hold Up” in the future

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Capital Structure in Project Finance 11

Source: economic motivations for project finance (Harvard Business school) SVKM's NMIMS University

Capital Structure 12

 Total Capital Required: Debt : 85% ($ 482 million)  Equity : 15% ($ 85 million) 

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Reasons for High Leverage 13

 Limit the managerial discretion over project cash

flow  Shorter Payback period  Mitigate sovereign risk by reducing reported profits  “Paradox of infrastructural investment”  Rather than increasing returns on project, a better solution is to reduce the risk by careful structuring  As sovereign risk falls, the appropriate required return falls SVKM's NMIMS University

Organizational Structure 14 Board of Directors

Chief Executive Officer

Head of Administration Executive Manager

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Chief Financial Officer

Technical Services Executive Manager

Operations Executive Manager

Head of Sales and Marketing

Finance Manager

Regional Operations Manager Australia

Regional Operations Manager Japan

Regional Operations Manager Guam

Board Structure 15

Source: economic motivations for project finance (Harvard Business school) SVKM's NMIMS University

Proposed Board Structure 16

Partner

No. of directors

Telstra

2

AT&T

2

Japan Telecom

2

Teleglobe

2

Lending Institution

1 or 2

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Proposed Compensation Structure 17

 Base Salary – For skills and experience  Executive Bonus – As per performance (0% to 50%)  Long term incentives – Stock options or cash

rewards

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Question: 18

 Can Take-Over Finance be used to solve the financial

structure issue?

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Take Over Finance 19

 Tripartite Arrangement between Project Company Lender Financial Institution(FI) to fund long term infrastructure projects  FI takes over the outstanding loan from the Lender

on a predetermined basis

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Advantages 20

Project Developer

• Gets Finances for long term Projects • Need not go and search for refinancer

Lender

• Asset Liability Management • Frees the funds to lend to other projects

Financial Institution

• Economic & Social Development • Faster Infrastructure Creature

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Our Take 21

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22

Thank You SVKM's NMIMS University