How Are Submarine Cable Networks Of The Future Likely To Be Financed? Andrew D. Lipman and Ulises R. Pin Constructing, maintaining and upgrading submarine cable networks requires significant amounts of capital. Are the sources of financing in 2006 different than those available in the past? Is there a role for venture capital, private equity or other sources of financing? The answer appears to depend mainly on the actual demand for capacity and the location of any potential new system. However, the ability to obtain funding for a new system not only lies on a strategically-located project, but largely depends on the sponsors’ ability to accommodate the requirements generally imposed by prospective investors and lenders. There are two large groups of submarine cable networks. The first group is formed by carrier-financed and operated submarine cable networks. Traditionally these systems function as “carrier clubs” where incumbent telecommunications providers of one or more countries join forces to build and operate the network. Typically, one carrier leads the group and is responsible for the overall administration of the network. Other carriers join the consortium and act as landing parties for the cable in their respective jurisdictions. Funds for construction
and operation of the networks are usually provided by the carriers and generally there is no need for outside sources of financing. Capacity on the network is allocated in proportion to each carrier’s participation in the consortium and is used by the carriers to transmit their own voice and data traffic. The second large group of submarine cables is comprised of “private” or non-carrier sponsored networks. These systems peaked in the late nineties, when a number of companies ventured into connecting the world. The business model is fairly straightforward, a private sponsor leads the construction of a network and raises funding from capital markets and/or commercial banks with the goal of providing bulk capacity to competitive telecommunications providers and large corporate users. Developers act as “carriers’ carriers” because they generally do not have their own traffic to transport, but aim at filling the requirements of others by leasing circuits or entering into sales of capacity mainly in the form of Indefeasible Rights of Use (“IRUs”).
During the telecommunications industry downturn in the early part of this decade, many of the carrier-sponsored cables remained relatively untouched, although there were very few announced new cables or expansions of existing cables. However, many of the private submarine cable network developers experienced financial difficulties, including several large companies that went bankrupt or were forced to refinance their networks. Many assets ended up in the hands of creditors that hoped to recoup their investments by selling collateral. Subsequently, the majority of these assets have been sold. Many of them were purchased at a few cents on the dollar of their original cost. For years it was perceived that there was just too much unused capacity available and there was no need for any new cables in the future. Moreover, it was unclear whether the telecommunications industry would ever be able to attract new capital. However, the worst years for the telecommunications industry appear to be over and the so-called “bandwidth glut” is slowly coming to an end, as increasing international bandwidth demand has depleted inventories of unsold circuits on many submarine networks. According to Telegeography, several network operators have lit additional wavelengths and fiber pairs on several routes as lit bandwidth supply and bandwidth demand are coming into balance. While this does not mean that there will be a multitude of independent new developers parading The Bandwidth Glut is Over, in Telegeography (April 13, 2006).
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