Telecom, Optus support cable company

By PETER GRIFFIN, telecoms writer

Telecom and Australian telco Optus have promised to open their chequebooks to support Southern Cross Cable if it fails to meet debt repayment targets, but troubled co-investor WorldCom has not made any commitment to stump up.

After months of negotiations with a syndicate of banks from whom Southern Cross borrowed US$950 million in March 2001 to develop its undersea cable network, it has been able to extend the maturity date of its debt to April 2008 from 2006.

But under the revised deal, Telecom and Optus have to provide contingent credit support to the banks for a maximum amount of US$151 million. Telecom, a 50 per cent owner of Southern Cross, bears most of the contingency credit risk - about US$105.7 million, while Optus, a 40 per cent stake holder, covers US$45.3 million.

WorldCom has hung on to its 10 per cent stake in Southern Cross despite speculation that it would try to shed its Southern Cross stake and interest in Australian internet provider Ozemail to free much-needed cash.

Telecom's general manager of corporate affairs, Philip King, said WorldCom had not been in any position to contribute.

"Their chapter 11 status makes anything like that difficult and the banks weren't all that interested in having WorldCom's support anyway."

Telecom and Optus would receive fees for providing the credit contingency. King said they would be "reasonably material".

The debt restructuring follows well-flagged warnings from Telecom that it faced the prospect of providing credit contingency for Southern Cross as slack demand for broadband services had meant the network racked up lower sales on its cables than it originally projected.

Telecom would have priority in reducing its credit contingency as more sales of capacity were made. To what extent sales and the pricing of capacity increase over the next few years was hard to estimate, but Telecom expected stronger sales for Southern Cross. "We're pretty confident that the market will pick up again. It requires existing capacity to be absorbed," said King.

That meant Southern Cross and therefore Telecom was dependent on capacity buyers operating high speed internet and networking services to stimulate greater demand.

"The cable is in a strong position because there is no other cable directly linking New Zealand and Australia with the US which has any spare capacity," King said.

To date, Southern Cross has repaid US$586 million of debt from cash generated through capacity sales.

It has commitments to repay a further US$235.7 million from further sales of capacity.

Southern Cross still has US$363.7 million in senior bank debt to repay by its 2008 debt maturity date. It is capitalised through US$30 million of shareholder equity and US$120 million in shareholder advances.