Cable deal too good to be true

By RICHARD BRADDELL

WELLINGTON - Banks were to fund the best part of the $US1.3 billion Southern Cross Cable between Australia, New Zealand and the United States - and have no comeback if the project went wrong.

It sounded too good to be true and it was.

A few months ago, the owners of the Southern Cross Cable project, Telecom, Cable & Wireless Optus and WorldCom MCI, took over funding of the entire cable themselves.

Actually, two cables will run between Australasia and the US and the owners will not be bearing the entire cost of the project, simply because a lot of work has to be done before it is completed.

Phase one, which runs north from Australia and New Zealand to the US, will not be operational until June 2000, while phase two, the return leg, will not be completed until October 2000.

And it is likely the project owners will soon have alternative financing arrangements in place. The cable looks set to pay its way, having already sold sufficient capacity to cover its cost.

Reasons for the termination of the original funding have not been detailed. It is likely delays in getting environmental consents in California, combined with capacity sales that are being agreed at prices a third of those originally offered to the market, have a lot to do with it.

Neither the delays nor the falling prices should have come as any surprise to the banks or the project's planners. Holdups in projects of this size are not uncommon and everything gets cheaper in telecommunications.

Although the logical choice for burgeoning internet traffic between this region and the US, Southern Cross will face some spillover in competition from new cables being installed across the north Pacific, where prices have been plummeting.

Half-owned by Telecom, the project is run as an independent company.

Its Bermuda-based vice-president of marketing and sales, Andrew Riddle, says one reason why the refinancing was important was that it gave flexibility to adapt strategy.

While the original bank participation had been vital in getting the project under way, it had become a crimp.

"Their understanding of the business is very different to ours," he said.

Because the banks were keenly interested in what was being done with their money, they demanded detailed analysis before moves could be made.

Mr Riddle said that a change to the business model had been necessary because the prices at which capacity was being offered were simply unaffordable to buyers in the quantities they wanted.

"We brought the price down to an affordable level and it was incredible. We went from a situation of being able to sell nothing to $US553 million of sales."

Another problem was that customers either bought at the outset - Southern Cross started off with $US642 million in presales in November 1997 - or would hedge their bets by waiting until the cable entered service before making a commitment.

So what of the customers who bought in 1997?

The Wellington-based Asia Pacific marketing manager, Ross Pfeffer, says they are covered by what amounts to a de-escalation clause which ensures they are not out of pocket. While their cash commitment remains the same, they are compensated with extra capacity so that the price averages out to later prices.

The capacity for the first leg of the project is almost completely sold already.

The outlook is so good that suppliers Alcatel and Fujitsu have been asked to supply equipment that will "light up" three times more capacity on the return cable than originally envisaged.