Q1. How would you characterize the project assets? What makes them different or unique?
Assets: Transmission Cable, Repeaters, Transmission Equipment, Landing Stations and
There are 2 mediums for long distance data transmission: Satellite and Cable
systems. Cable systems offer better quality, lower costs and can carry much more
capacity compared to the satellite systems.
It is the core asset for the project.
A 12500 kilometres long fiber optic cable will be laid out for the project.
The life of the cable is estimated at 25 years.
The transmission cable failures usually happen in the shallow water areas. Using
collapsed ring configuration would be the major advantage for AJC as it would reduce
the capital costs considerably.
Once the cables laid out they are highly reliable since only 1 (average) failure is
usually recorded in a cable’s life.
It is not very expensive to upgrade traffic capacity, i.e., $25 million/40Gbps. However,
it takes around 12-15 months to implement it.
It may be difficult to attract lenders for such project. Example, on a visit to Mundra Port
Single Point Mooring, we were explained by the instructor that it was very difficult to
convince the ‘bankers’ that a system like that could require such huge investment (INR
50-100 crores). What the bankers saw was a 200 sq ft metal floating body (most part
was invisible) and it took an effort by the engineers to explain the bankers about the
inherent complexity and hence the costs associated. AJC project might have faced a
similar issue at that time.
Repeaters are required for every 400 kilometres to reshape and boost the signal as it
becomes attenuated when transmitted over long distances.
Transmission Equipment comprises of transmitter, router and reception hub and
determines the capacity of the system to transfer the signals. It could be easily
upgraded to handle more traffic.
Landing Stations and Ships are hired for the project. Ships are used to install Cables
As the telecom sector is highly evolving (in 1999), there is always technology risk
associated with such projects. There is a possibility of bigger and better technology
(which would handle higher and much bandwidth) in such an environment.
The revenues are front loaded as much of the revenue is recognised in the earlier
years of the project (in terms of their contribution to the NPV).
The operation costs are fairly consistent for the life of the project.
Most of the capital expense will occur very early in the project.
Q2. Who provide capital to the AJC project? Are they likely to earn an appropriate risk
adjusted return on their investment? What potential problems could arise that would prevent
them from earning a return on their invested capital?
NPV and IRR for 3 scenarios has been calculated in the excel sheet.
The capital for the project would come from the sponsors and consortium of banks.
The project would have fairly high financial leverage (85%). To obtain their target debt
structure, they wanted to raise 2 debt tranches:
Senior debt: Repayments would come from presale commitments.
Junior debt: Repayments would come from future sales of capacity.
Technology risk: Telecom Sector is evolving rapidly and hence there is technological
risk associated with the project.
Completion Delay Risk: Since most of the revenue is front loaded, any delay in the
project will have much adverse effect on its valuation. It can also happen because of
environmental clearance delays, etc.
Political Risk: As the project covers more than one country, we need to take into
consideration the sovereign risk. Since we have sponsors from each country
associated with the project, the risk is somewhat mitigated.
Market Risk: To mitigate this they will need presale contracts.
Credibility Risk: Depends on the composition of the sponsors.
Operational Risk: Price Volatility is very high and there’s also risk of demand. They will
partner sponsors strategically to reduce uncertainty with the revenue and to reduce the
costs (landing stations).
Q3. How would you structure the project company to mitigate these problems? What are your
recommendations in terms of?
a. ownership structure (how many sponsors and which ones)
b. capital structure (project fin vs. corporate fin)
a. Ownership Structure:
Factors to be considered are Compatibility, Affect on Project Cost and Revenue.
The project costs may be reduced by utilisation of the landing station of sponsors and also
the revenue can be made certain if the sponsors are themselves buyers for capacity.
We would go for 4 sponsors:
Telstra, Japan Telecom, Teleglobe, and AT&T: AT&T would enable us to use the Guam
Landing station and also would buy some capacity. Their debt rating is AA- which would
add to the credibility for lenders.
b. Capital Structure
Although, the financial leverage is high (85%), it would make them share the project risk
with the lenders of the project. They could allow high leverage because of high amount of
certain cash flow. Project Finance is recommended for the project as it would prevent
exposure of risk to the sponsor companies’ assets. The high debt taken by the sponsors
would be off-the balance sheet for them.
As there is high free cash flows associated with the project, there is bound to be
mismanagement risk of the fund. Having high leverage position would prevent this as free
cash flow would reduce in high debt situation.
c. Organisational Structure
The sponsors will have equal stake in the shareholding pattern. This way all of them will
have equal say in the functioning of the project. All the shareholders hold strong positions
and add value to the project; the board will be represented equally by the sponsors. This
would prevent any conflicts in the decision making.