PROJECT FINANCE

Australia Japan Cable:

Structuring the project Company

Submitted to: Dr. Chakrapani

Submitted by: Group 8

Mani Kumar - 18A2HP445
Sahaj Kumar - 18A2HP430
Sai Chander - 18A2HP424
Sai Mouli - 18A2HP
Niraj Tiwari -
1. How would you characterize the project assets? What makes them unique?
Assets: Transmission Equipment, Landing Stations, Repeaters, and Transmission Cable
Ships:
 Cable and Satellite Systems were the 2 mediums for the long distance data transmission.
Cable systems, when compared to satellite system offers Cost advantage (lower Costs) and
better quality.
 Ships are considered to be the core assets of the project.
 For the project, a long fiber optic cable of length 12500 is laid out, whose expected life is 25
years.
 Usually, the failure of transmission cables happen in the shallow water areas. The major
advantage for AJC would bb to use collapsed ring configuration which results in reduced
capital costs.
 Since the failure of a cable is 1 (average) in its entire life it is highly reliable once they are laid
out.
 The upgradation of Traffic Capacity is not much expensive i.e $25 million/Gbps but takes
around 12 to 15 months for its implementation.
 Attracting a vendor for such projects is one of the difficulty. For Example, The instructor at
the Mundra Port Single Point Mooring explained that Convincing the bankers is the most
difficult part it require a huge investment of around (50-100 crores). According to the bankers
a 200sq ft metal floating body was invisible and the engineers were not able to easily make
the bankers understand the complexity situated inherently, So there is a huge association of
costs to it. So may be the AJC Project may have faced the same problem at that time.
 There is a requirement of repeaters every 400 km to reshape and increase the signal as when
transmitted over long distances it becomes attenuated.
 Ships and Landing Stations are hired, where inorder to install Repeators and Cables, Ships are
used.
 Technology risk will always be present with such projects because of the high evolution of
Telecom Sector, So in the near future there could be a better and bigger technology in such a
kind of environment.
 For the entire life of the project the operation costs are constant.
 In the initial years of the project, there will be more occurrence of the capital expenses.
 The revenues are huge as in the initial years of the project huge revenues are recognized (in
terms of their contribution to the NPV).
2.Who are the capital providers for 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 invested capital?

In the excel sheet we have been calculated the NPV and IRR for the 3 scenarios.
Sponsors and consortium of banks would provide the capital for the project and the financial
leverage of the project would be high. In order to fulfill the target debt structure, they need to
raise 2 debt tranches:
Senior debt: Repayments will come from presale commitments.
Junior debt: Repayments will come from sales of the capacity.

 Credibility Risk: It depends on the composition of the sponsors.

 Operational Risk: Risk of the demand and Price Volatility is very high. They will
strategically partner sponsors to reduce uncertainty and cut costs.
 Market Risk: They will need to presale contracts to mitigate the risk.
 Technology risk: The telecom sector is evolving rapidly and thus the project is associated
with technological risk.
 Completion Delay Risk: Front loaded revenue is larger portion, any delay in the project
will have a major adverse effect on valuation and can also happen due to delays in
environmental delays.
 Political Risk: Considering that project covers more than one country, sovereign risk is
taken into account. The risk is mitigated because project has sponsors from each
associated country.
3. How would you structure the project company to mitigate these problems? What are your
recommendations in terms of?

Ownership Structure:
 For mitigating the risks regarding ownership structure, we must consider compatibility and what
is the affect on the project cost and the related revenues.
 We can reduce the project costs for the company by utilizing the sponsors landing station.
 If the sponsors are willing to buy our capacity, we can make certain revenue out of that easily.

Recommendations:
Australian Japan cable would consider 5 sponsors for the project
1) Telstra-40% (Major Sponsor)
2) Japan Telecom-20% (Landing station & capacity)
3) Teleglobe-10% (Capacity)
4) AT&T-10% (Landing Station)
5) NTT-20% (Landing station & capacity)

Capital Structure:
 In this case, as there is high amount of cash flows, they will allow high leverage. Here the
financial leverage is very high (85%) which makes the lenders to share the risk.
 As we should prevent the exposure of risk of the assets which are sponsored by sponsor
companies “Financing the project” is recommended.
 As there are high free cash flows linked to the project, the fund's risk of mismanagement is
bound to occur. Having a high leverage position would prevent this, as free cash flow in high
debt situations would reduce.

Organizational Structure:
 Sponsors for this project should have a equal stake in the share holding pattern so that they
have equal rights while functioning the project.
 As the board will be represented equally by sponsors, all the shareholders hold the strong
position which results in adding the value to the project.
 By following the organizational structure in the above ways it would prevent conflicts in decision
making.
Board Structure
 Based on average board size of 9, the board from the sponsors could be divided as per the
following:
Telstra 2 Directors
Japan Telecom 2 Directors
NTT 2 Directors
AT&T 1 Director
Teleglobe 2 Directors

Management Compensation
 Management compensation will be as follows
i. Performance based bonus (up-to 50%)
ii. Basic salary will be based on prior experience and level of skills.
iii. Stock Options