Australia – Japan Cable

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The Australia-Japan Cable company. The project is almost on completion & is successful.

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Australia – Japan Cable

  1. 1. Presented by:- Rohit Jain Shally Rathi
  2. 2. Overview <ul><li>12,500km cable from Sydney </li></ul><ul><li>Australia to Japan via Guam at a cost of $520m </li></ul><ul><li>Key sponsors: Japan Telecom, Telstra and Teleglobe. Asset life of 15 years </li></ul><ul><li>Potential Sponsor: AT&T , NTT, MCI WorldCom </li></ul><ul><li>A Joint Feasibility study was carried out for the sponsors </li></ul>
  3. 4. Submarine Cable Industry
  4. 5. Submarine Cable Technology
  5. 7. Demand for Submarine Cable Systems <ul><li>From 1990 to 1999, the global telecommunications market grew at a compound annual rate of 10.2% </li></ul><ul><li>US$348 billion to US$835 billion </li></ul><ul><li>In the late 1990’s the demand grew & faster growth in capacity caused prices to fall at a rate of 20% to 40% per year </li></ul><ul><li>Ovum predicted that the cost of an STM had fallen from US$10 million in 1998 to US$5 million by the end of 1999, would be US$1 million by 2003 </li></ul><ul><li>As a result, system owners faced front-loaded revenue & cash flow streams. </li></ul>
  6. 8. Financing
  7. 9. Reasons – Club Financing <ul><li>Expensive </li></ul><ul><li>Slow & predictable growth in demand </li></ul><ul><li>Limit their exposure </li></ul>
  8. 10. Private Carrier Deal Structure <ul><li>Larger blocks of capacity </li></ul><ul><li>Quicker execution </li></ul><ul><li>Competitive </li></ul><ul><li>Market prices below their costs </li></ul><ul><li>First Deal:- </li></ul><ul><li>Cable & Wireless and WorldCom(1995) </li></ul><ul><li>Gemini – 20 Gbit/s (US & UK) </li></ul>
  9. 11. Private Non-carrier Deal <ul><li>Ownership of cable systems to non – carriers such as private investors </li></ul><ul><li>In 1996, the Pacific Group, a private investment firm completed the first private no carrier deal to raise equity to build Atlantic Crossing-1 (AC-1) </li></ul>
  10. 12. Building Submarine Cable Systems <ul><li>First, system owners needed to choose equipment suppliers and sign supply contracts </li></ul><ul><li>Second, system owners hired cable ships to install the cable and repeaters as the cable ship industry was highly concentrated </li></ul><ul><li>“ Landing Party Agreements” – a contract to use preexisting stations </li></ul>
  11. 13. Australian Submarine Cable Industry <ul><li>1999 – 3 Australian Traffic Cables </li></ul><ul><li>SEA-ME-WE3 </li></ul><ul><li>PacRim East & West </li></ul><ul><li>Telecom Corporation of New Zealand, Cable & Wireless of Australia, and MCI WorldCom of United States </li></ul>
  12. 14. Southern Cross Cable Network <ul><li>US$1.2 billion cable network </li></ul><ul><li>29,600 km loop configuration system </li></ul><ul><li>Linking east coast of Australia, New Zealand & United States </li></ul><ul><li>Merrill Lynch analysts conducted an independent analysis of the project </li></ul>
  13. 15. The Australia Japan Cable (AJC) <ul><li>Telstra - leading telecommunication and information services company </li></ul><ul><li>International transmission infrastructure included both satellite and submarine cable transmission </li></ul><ul><li>Major submarine cable investment- SEA-ME-WE3, China-U.S. cable and Japan-U.S. cable </li></ul>
  14. 16. PHILOSOPHY <ul><li>“ Sell shore to shore service on a wholesale basis and AJC should be producer of basic capacity services with wholesale and retail sellers between AJC and the end users” </li></ul>
  15. 17. Execution Process of AJC <ul><li>Telstra commissioned $6 million feasibility study in mid-1997 for AJC through Guam </li></ul><ul><li>Reasons to go through Guam:- </li></ul><ul><li>1) More efficient to surface and repower the signal than send it all the way to Japan </li></ul><ul><li>2) It could connect with other cables running through Guam </li></ul><ul><li>Use of Collapsed Ring Configuration </li></ul>
  16. 18. Australia Japan Cable (AJC) <ul><li>System would use Telstra’s 2 landing stations near Sydney </li></ul><ul><li>In Guam, the project could contract with AT&T to use landing stations </li></ul><ul><li>Telstra envisioned private carrier deal using project finance structure to fund construction </li></ul><ul><li>Telstra engaged ABN AMRO to advise on financing strategy </li></ul><ul><li>Brian Tellam, director of project finance at ABN AMRO, believed project could support highly leveraged capital structure </li></ul>
  17. 19. Funding:-
  18. 20. Risk’s - AJC <ul><li>Market risk due to presence of number of competitors. </li></ul><ul><li>Completion delay due to environmental approvals and other permissions </li></ul><ul><li>Physical construction was not a big deal </li></ul>
  19. 21. Debt Tranches <ul><li>Telstra envisioned 2 debt tranches:- </li></ul><ul><li>1) Tranche A- secured and repaid (within 5 years) with pre sale commitment </li></ul><ul><li>2) Tranche B- repaid from future sales of capacity to other parties (within 5 years) </li></ul>
  20. 22. Contd.. <ul><li>Findings of feasibility study :- </li></ul><ul><li>There was more than sufficient capacity demand </li></ul><ul><li>Expected cash flow could support highly leveraged capital structure </li></ul><ul><li>Japan telecom and Teleglobe agreed to sign MOU with Telstra </li></ul>
  21. 23. Structuring The Project Company
  22. 24. Project Governance
  23. 25. <ul><li>Key Issues:- </li></ul><ul><li>Limited growth potential </li></ul><ul><li>Market risk from fast changing telecom market </li></ul><ul><li>Risk from project delay </li></ul><ul><li>Specialized use asset </li></ul>
  24. 26. Current Updates <ul><li>http://www.ajcable.com/news-and-media/australia-japan-cable-collaborates-to-create-a-connectivity-solution-on-aag/ </li></ul>
  25. 27. <ul><li>THANK YOU </li></ul><ul><li> </li></ul>

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