Cable delay raises Telecom debt load

By RICHARD BRADDELL

WELLINGTON - Delays in the construction of the high-capacity, $2.5 billion Southern Cross Cable to North America have forced its shareholders to take over the financing - and could wipe considerable value off the project.

Telecom owns 50 per cent of the project in conjunction with 40 per cent shareholder Cable & Wireless Optus and 10 per cent partner MCI WorldCom.

At its profit announcement last week, Telecom revealed that the cable would not carry traffic until June next year. Completion was not likely until November, three months after the original timetable.

Delays in obtaining environmental permits in California had also terminated a non-recourse bank debt facility providing most of the finance.

By September 30, Telecom had contributed $US57 million out of a total of $US75 million required from it under the financial package.

"However, the facility required major alterations to accommodate delays in obtaining Californian environmental permits and recent changes in Southern Cross' marketing strategy," said Telecom.

It said that after a meeting in August, which showed the need for significantly more money, the shareholders had substituted the banks and were providing interim funding before refinancing the project on a basis closer to present needs and the advanced state of the cable construction.

At the present rate of progress, Telecom may have had to find a further $450 million to replace its share of bank funding - on top of the $1.5 billion it raised to pay for its 78 per cent stake in Australian telco AAPT.

The director of regulatory and public affairs at Optus, Stephen Wilks, said the banks had a position on where they wanted to be and the partners could each afford to take Southern Cross back on their books.

"It just worked out better for everyone," he said. "I think we are fairly comfortable with the take-up."

While Telecom expects the cable to repay its borrowings in the first few years, the delays could make a significant dent in the project's value, particularly if a portion of it is put up for a public float.

International cable capacity prices have been falling dramatically. Telecommunications consultancy Ovum forecasts that Northern Hemisphere prices, which have halved to $US5 million per standard 155 megabit connections in the past year, will go to $US1 million by 2003.

Cashflows from the cable will ultimately determine its value, but in August Southern Cross slashed pre-commitment prices to North America by a third to $US12.9 million, while the transtasman rate was halved to $US4.1 million.

Analysts are generally unfazed by the delays, and competitors suggest that while the lower prices will take some icing from the cake, it will still be a very good one.

But a potential purchaser of capacity in Australia said prices seemed to be falling "by 30 per cent, every time you looked."

Delays in completing the project would inevitably drive prices lower still as potential buyers held off and alternative routes to North America via Asia came on stream.