EVOLUTION OF FIBER OPTIC NETWORK FINANCING
The need to finance a new fiber optic cable network is a relatively recent challenge. Undersea cables prior to the mid-1990’s – when monopoly telecom carriers and governmental telecom ministries (PTT’s) dominated the scene – were typically sponsored by consortia of as many as 30 governmental and quasi-governmental entities in which each participating carrier would invest an equity share, as a co-owner, in exchange for a proportional allocation of bandwidth capacity on the new cable.
These equity contributions paid for the construction costs, and the consortia members committed to the future operating and maintenance costs. Thus, any financing of the equity investment was at the level of a consortium member and based on its balance sheet, not on the project itself. Creditworthiness of the co-owners was generally not a major concern, as the equity participants were either governmental or large utilities (e.g., AT&T).
The combination of deregulation and privatization in telecommunications around the world, forecasts for exponential growth of demand for bandwidth, and advances in technology lured private investors in the latter half of the 1990s to proposed undersea fiber optic cable projects.
From the rush of press announcements, it almost seemed that cable networks predicated on anticipated capacity demands could not be built fast enough to satisfy the market's appetite for investment opportunities and bandwidth. This environment enabled sponsor/operators such as Flag, 360networks, Level 3, Global Crossing, and Southern Cross to develop systems on a speculative basis in which all or a significant portion of the capacity was not committed-to by the sponsors but instead was subject to market sales to users.
Many of the sales were in the form of “pre-sales” of capacity prior to Ready For Service dates to telecommunications operators, carriers and users. Typically these were in the form of 20-year Indefeasible Rights of Use for the capacity, where all or a substantial part of the capacity purchase price was paid at the time of contracting, with monthly or quarterly payments for operating and maintenance charges. Alternatively, cable owners could sell strands of the actual fiber optic cable itself, in the form of a sale of a “dark” fiber pair, thus giving the purchaser the right to connect (or “light”) the cable to its own optical equipment, to transmit its own traffic and to upgrade the capacity of the fiber pair as it wishes. Cash-flow from these pre-RFS arrangements, whether in the form of IRU's, leases or fiber pair purchases, can make these systems attractive investments. In fact, arrangements such as these were the foundation for the financing of these systems.
Some of the companies developing these new networks, such as Global Crossing, Level 3, TyCom and others, were able to take advantage of the buoyant (at the time) capital markets and raise equity or high-yield debt partly on the basis of strong management teams and rosy forecasts for capacity revenues. The proceeds of these offerings, together with early revenues from pre-sales or in some cases investments by other strategic partners, funded construction costs and initial working capital needs.
Other projects have been financed on a project finance basis, often employing loans from vendors as a foundation stone of the financing, with loans from commercial banks (perhaps supported by export credit agencies) supplying the bulk of the credit. Unlike financings that are subject to the vagaries of the capital markets, the markets for commercial bank and vendor financings have been generally available and more stable. On the other hand, such financings are highly structured and thus complex undertakings.
CONCLUSION
The current financial and industry environment will not allow the types and ease of financing witnessed just a few years ago. Broadly speaking, projects will either be financed on the balance sheets of their creditworthy sponsors, or have to utilize a variety of financing sources. The latter approach is inherently more complicated, potentially relying on sales of fiber pairs to finance construction, pre-sales in the form of IRUs where possible, vendor financing where available, ECA support if the project qualifies, and commercial bank loans in a project finance structure. This multi-sourced solution poses unique challenges for all project participants. The sponsors must find a way to balance the competing interests of sometimes reluctant purchasers and lenders, identify and comply with the regulatory and legal requirements associated with undersea cable laying in each applicable country, provide a meaningful security interest for the lenders. The complexity of these financings cannot be overstated.
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