In the past week, Citibank along with three joint coordinating arrangers ù Sumitomo Bank, Bayerische Landesbank and China's ICBC ù have been selling a $700 million project financing for SingTel spin-off, C2C.
C2C was formed in July 2000 to develop a 17,000-kilometer undersea cable network to provide a city-to-city broadband Internet service linking China, Hong Kong, Korea, Japan, the Philippines and Taiwan. Construction of the project is due to be completed by the end of this year and the $700 million loan will go towards paying off the total cost of around $2 billion.
Aside from the loan, the cost of the project will be covered by $500 million injected by SingTel, which owns a 60% interest in C2C, equity provided by the other shareholders ù Globe Telecom, GNG Networks, iAdvantage, KDDI, New Century InfoComm, Tycom Asia Networks and Norwest Venture Partners ù and pre-orders totaling at least $1.4 billion.
The C2C loan features a five-year $660 million amortizing tranche and a $40 million three-year revolving tranche. With an average life of 3.3 years and a margin of 150 basis points over Libor, the all-in cost is expected to be 168 basis points.
As the loan is non-recourse to SingTel, the pick up is far more attractive than it would be on a loan for an official SingTel borrowing. For example, the recent A$3 billion ($1.52 billion) bridge loan taken out to part finance SingTel's offer for Cable & Wireless Optus pays only 17 basis points.
There are some fears that the telecoms sector is plowing too many resources into the broadband Internet business, and that a combination of fierce competition, high capital costs and insufficient demand could endanger the ability of companies to meet their financial obligations.
"I'm not saying there are problems with this particular deal, but a large amount of capacity is flooding into the Asian market," observes one banker. "A number of deals ù Hutchison Global, Southern Cross, Flag North Asia ù are being done to supposedly exploit the expected huge leap forward in demand for broadband services.
"Evidence, however, suggests that those leaps in demand are happening more slowly than the fall in price for Internet services, which is going to affect profitability," the banker adds. "A company is going to need a large amount of pre-sales to be competitive and the sector is going to face quite a challenge in paying off its debts."
That said, the syndicated loans market is still offering borrowers relatively low-cost financing and it may be wise for C2C to hit the market now before spreads widen further. An official at Citibank had no doubts that the borrower would be able to repay the loan.
"We decided to do the deal based on fairly conservative assumptions and would not have done so if we thought there was any danger of default," says the banker. "Our assumptions took into account capital structure of the borrower and the capacity issue. And when we were looking for sub-underwriters to come in, initially we were only looking for two banks, but three banks came in and were prepared to fully underwrite $200 million of this deal."
