20/06/14

1
!"# %&'()*'+), -*(./'0 1&2
2 20/06/14 A!C Case ulscusslon PandCuLs
Cb[ecuves
Agency CosL Mouvauon - governance sLrucLure for pro[ecL
cosL Lo mlnlmlze agency conlcL - ownershlp & conLrol,
Cwnershlp and relaLed parues & debL and equlLy holders
!ensen's(1986) - lree cash ow problem ln lnformauve
semng - uebL based governance sysLem Lo force mangers
Lo dlsgorge free cash ows
AsseLs mosL approprlaLe for l - large, Langlble wlLh hlgh
free cash ow and Lransacuon speclc uses- suscepuble Lo
opporLunlsuc behavlors
uocumenLs sLyllzed facLs - Leverage rauos, ownershlp
sLrucLures, board sLrucLure and caplLal sLrucLures
Cood Lxample of Pype LhaL hlL Lelecom lndusLry ln 1990
and caused bankrupLcy of over 60 rms durlng 2000-02
3 20/06/14 A!C Case ulscusslon PandCuLs
Secuon l
ldenucauon of oLenual roblems
WhaL ls CorporaLe Covernance?
Ways ln whlch suppllers of nance Lo corporauons
assure Lhemselves of gemng a reLurn
Pow should Lhey ensure ln case of A!C?
3 20/06/14 A!C Case ulscusslon PandCuLs
AsseL CharacLerlsucs
Large ($320 -367 mn)
1anglble
Speclc use (Lransmlsslon servlce )
uurable speclallzed asseLs
normal Cash ow - Large expendlLure lnlually before any revenues
llxed lnvesLmenLs - noL sLaged - only valuable once compleLe
CapaclLy upgrades - expanslon opuon aL Lremendously unequal cosL
Lo capaclLy rauos compared Lo orlglnal lnvesLmenLs. See 7
8eLaln slgnlcanL opuon value ln evenL demand explodes as an lncremenLal
3 lnvesLmenL can double capaclLy
Lconomlcally lndependenL on compleuon
LlmlLed llfe (13 year economlc llfe, physlcal llfe 23 yrs for Cable)
1echnologlcal changes can make economlc llfe much shorLer
Landlng SLauons - crlucally lmporLanL - noL easy Lo bulld - Lhlrd parLy
dependablllLy
8 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
2
ConL..
roLablllLy
See LxhlblL 6
SCCn - a reasonable proxy
Cash ows - A!C would have approx $30 Lo $ 230 per
year (huge cash ows)
L8lu1A Margln
8ol and 8oL
nv and l88 (27.1, nv $332 [ 13 dlscounL)
9 20/06/14 A!C Case ulscusslon PandCuLs
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Free Cash-Flow (Base
Case) ($50.00) ($100.00) ($500.00) $363.00 $209.00 $175.70 $114.30 $94.50 $219.50 $446.10 $338.40
Revenue Growth
Downside Case 170.00% 23.50% 15.70% 11.40% 9.90% 16.90% 27.50% 20.50%
Base Case 181.00% 26.00% 18.50% 14.10% 11.10% 18.10% 27.40% 19.40%
Upside Case 184.50% 27.40% 39.60% 52.10% 39.40% 17.00% 14.50% 12.70%
EBITDA Margin
Downside Case 50% 81% 82% 82% 82% 82% 82% 84% 84%
Base Case 50% 80% 83% 84% 84% 84% 84% 86% 86%
Upside Case 50% 81% 83% 87% 90% 92% 92% 92% 92%
ROE (on US$150m)
Downside Case -2.50% -7.50% -60.00% -20.90% -4.70% 6.40% 12.40% 15.80% 23.00% 37.60% 51.10%
Base Case -2.50% -7.50% -60.00% -18.40% -0.80% 12.10% 17.50% 22.10% 31.00% 47.70% 62.30%
Upside Case -2.50% -7.50% -60.00% -17.40% 2.70% 21.30% 48.90% 79.80% 97.90% 115.70% 133.20%
Source: Case Exhibit 6 and casewriter analysis.
11 20/06/14 A!C Case ulscusslon PandCuLs
ConL.
8lsk
Low on consLrucuon
roven Lechnology of bulldlng Lhe under sea cable
uelays ln dellvery may happen due Lo unavallablllLy of cable laylng vessels, delay ln
equlpmenL supply
rlmary Sponsors has experlence ln pasL Lo bulld and operaLed Lhe sysLem
Well esLabllshed player- wlLh enough compeLency
Low Soverelgn rlsk
looJloq 5touoo lo Coom coolJ be o ptoblem (p 6)
klqbt of woy - petmlssloo to btloq coble oosbote - os qovt. qtooteJ petmlts
spotloqly ooJ oppllcouoo ptocess too ume
cleotooces ftom locol fsbloq ooJ qovt. ootbotlty
ovltoomeot cleotooces (5ee 5ccN pq 5)
Motket ltlce - lollloq 20-40X pet yeot - see xblblt 2 & J
1ecbooloqy obsolesce
5poosots slqoloq pte sole coottoct - to obllqote boy mlolmom copoclty
85 X levetoqe
12 20/06/14 A!C Case ulscusslon PandCuLs
1he economlc le:
roblems LhaL aecL Lhe creauon of Lhe ple - wlll
lL ever exlsL?
roblems LhaL aecL Lhe slze of Lhe ple - Pow blg
wlll lL be?
roblems LhaL aecL Lhe dlvlslon of Lhe le - Pow
blg ls your sllce?

16 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
3
Creauon of le
ro[ecL ls never compleLed - or lf anoLher group beaLs A!C Lo Lhe markeL wlLh anoLher cable -
Lhen Lhere would be no ple
Slze of Lhe le
Lven lf A!C geLs lnLo Lhe markeL - Lhere are
CosL overruns
consLrucuon delays
Lxcess CapaclLy (dramauc lncrease)
Slowlng of demand growLh
lnLernal ConlcL - Sponsors - are owners and users
Leakage ln le
Sub opumal eorL and excesslve perqulslLe consumpuon (!ensen & Meckllng 1976)
8elauonshlp - or Lransacuon speclc use -ex anLe under lnvesLmenL or ex posL opporLunlsuc
behavlor -
Pold up - Landlng sLauons - conLracLs - A!C may nd dlmculL Lo own landlng sLauons -
Landlng sLauon operaLor may have ex posL sLraLeglc behavlor
17 20/06/14 A!C Case ulscusslon PandCuLs
Secuon 2
Pow ro[ecL SLrucLure solves hold up and free
cash ow conlcLs ?
19 20/06/14 A!C Case ulscusslon PandCuLs
Agency
ConlcLs ln
ro[ecL
Company
Cwnershlp
SLrucLure
ConLracLual
SLrucLure
8oard
SLrucLure
Crganlzauonal
SLrucLure
CaplLal
SLrucLure
21 20/06/14 A!C Case ulscusslon PandCuLs
Solvlng Pold up problems (landlng sLauons)
Pow Lo govern Lhe Lransacuons Lo prevenL hold up by
relaLed parLy
SpoL Lransecuons (markeL)
1ransecuon speclc asseLs- suscepuble Lo opporLunlsuc behavlor
verucal lnLegrauon (hlerarchy)
Allgn lncenuves of all Lhe parues
Long Lerm conLracLs (hybrld)
Would work rovlded
All crlucal lnfo known ln advance Lo wrlLe a conLracL
MusL be able Lo monlLor compllance
ConLracL musL be enforceable
22 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
4
Can hold up problem be mlugaLed by addlng landlng
sLauon as addluonal sponsor?
WhaL lmpacL lL would have on equlLy?
WhaL lmpacL lL would have on board composluons?
Wlll lL add Lo operauonal success or Lo rlsk cosLly delay?
Whlch group Lo be added as sponsors Lo mlugaLe
Lhose? (see exhlblL 7)
23 20/06/14 A!C Case ulscusslon PandCuLs
1he pro[ecL should use a comblnauon of long
Lerm conLracLs and [olnL equlLy ownershlp
Sponsors should lnclude aL leasL one LhaL would
be wllllng Lo leL use pro[ecL landlng sLauon.
Assumlng 83:13 debL Lo equlLy Lhree sponsors would conLrlbuLe
a LoLal of $83 mn ($320 x 13), le $28mn each
8y addlng [usL Lwo more equlLy lnvesLor Lhelr lnvesLmenL would
reduce by 40 ($83mn/3 sponsors = $17mn)
Sponsors need Lo rlsk pro[ecL debL Lo reduce Lhelr
exposure and hlgh leverage Lo relnforce Lhe
conLracL.
24 20/06/14 A!C Case ulscusslon PandCuLs
WhaL role wlll pro[ecL debL play ln solvlng hold up?
Pelps sponsor concenLraLe equlLy
8educe slze of lnvesLmenLs
Large caplLal commlLmenLs lncreases a rms poLenual dlsLress cosL
(managerlal rlsk averslon)
uebL Lransfers pro[ecL rlsk from sponsors Lo lenders - provldes a
walk away puL opuon
Lnforces conLracLual agreemenL
Plgh debL absorbs mosL of cash ows wlLh llule room for all
parues(equlLy holders lncludlng landlng sLauons) Lo exLracL quasl
renLs- deLer holdup
uebL can also deLer hosL govL. and unlon bargalnlng power
uo corporaLe debL also do all Lhls? no.
As Lhe cash ows from many asseLs cross - collaLerallze corporaLe
debL obllgauons. nor corporaLe debL allow [olnL ownershlp
26 20/06/14 A!C Case ulscusslon PandCuLs
Solvlng lree Cash ow problems (Agency -
Managerlal dlscreuon)
Mangers who conLrol Lhe asseLs are llkely noL Lo
have same ob[ecuves as share holders who own
Lhe asseLs.
1he conLrol funcuon of debL ls more lmporLanL -
as Lhe pro[ecL generaLe large cash ows wlLh low
growLh prospecLs and shrlnklng ows. (8erle and
Means 1932, lame and !enlson 1983, !enlson
1986)
27 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
3
Severe Agency conlcLs over free cash ows for ro[ecL
Companles due Lo
non exlsLenL Lake over markeL- pro[ecLs prlvaLely held
roducL markeLs do noL exerL much lnuence as pro[ecLs are low cosL
producers once compleLe ln cerLaln lndusLrles
LlmlLed role of repuLauon ln pro[ecL nance
lor sponsors non recourse naLure nullles repuLauon eecL and ls only
a facLor for ones who repeaLedly enLer l markeL
AL pro[ecL level repuLauon do noL exlsL as pro[ecLs are greeneld
enuues
Llquldaung evenLs are noL posslble as pro[ecLs are wasung asseLs wlLh
llmlLed llves
SLaged commlLmenL noL posslble as sponsors lose mosL bargalnlng
power once Lhey begln consLrucuon
Sponsors do noL learn much ull compleLed - no beneLs of sLaglng (eg.
lpellne, Loll road eLc)

28 20/06/14 A!C Case ulscusslon PandCuLs
Pow how can pro[ecL sLrucLure help mlugaLe Lhese conlcLs?
Why mlghL lL solve Lhem more emclenLly Lhen a corporaLe
governance sLrucLure?
Cne way for owners Lo exerL conLrol ls Lhrough 8oard of
dlrecLors
Pow come managers become more llke owner?
A cotpotouoo JepeoJs oo sbotebolJet fot copltol, bot tesetves
Joy-to-Joy toooloq of tbe eotetptlse fot moooqemeot - tbls
cteotes oppottoolues fot e[cleocy ooJ olso fot obose (bootJ)
ote llok betweeo moooqets ooJ owoets-leoJets
29 20/06/14 A!C Case ulscusslon PandCuLs
8oard Composluons
ro[ecL 8oard dlers from corporaLe boards
MosL sLraLeglc declslon are Laken by sponsors before board ls
creaLed
8oard, noL Lhe managemenL Leam Lakes mosL lmporLanL
operaung declslons
ulrecLors are responslble for hlrlng, rlng and monlLorlng Lhe
managemenL Leam
ulrecLors musL have proper lncenuves Lo safeguard ownershlp
lnLeresL..?
30 20/06/14 A!C Case ulscusslon PandCuLs
WhaL klnd of dlrecLors should A!C have?
Composluon
lnslde - gray or ouLslde? - voLe..
lnslde - omcers of pro[ecL company - do noL solve conlcL of ownershlp and conLrol
Cray-amllaLed - represenLauve of sponsorlng rms - assoclaLed wlLh pro[ecL as advlsors wlLh
relevanL lndusLry knowledge
CuLslde - lndependenL or unamllaLed people Lo oer ob[ecuvlLy and skllled declslon conLrol -
may noL be ln good posluon Lo provlde sLraLeglc dlrecuon
Slze
Pow many dlrecLors should Lhe company have?
8oard Slze
voung rlghLs (value welghLed or equal number of dlrecLor for each sponsor) See Plbbard's
vlslon- p.9.
Composluon of Sponsors as owners and capaclLy buyers and Landlng SLauons
8oard SLrucLure - dlrecLors compensauon
ulrecLors are employees of sponsorlng rmand noL equlLy holders
ulrecLors compensauon uded Lo performance of Lhe asseLs Lhey oversee
ln corporaLe nanced sLrucLure - A!C would be only 3 of LoLal asseLs of 1elsLra - whaL
lncenuve corporaLe dlrecLor would have Lo monlLor A!C?
32 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
6
ro[ecL ManagemenL and Compensauon
Pow would board ensure LhaL managers wlll properly execuLe
Lhe sLraLegy?
1hree levers of conLrols
ulcLauon of responslblllues ( conLracLual obllgauons)
Compensauon (CarroL)
MonlLorlng/ulsclpllne (suck)
ro[ecL nance also called conLracLual nance - llmlLs
managerlal dlscreuon and conLracLual agreemenLs dlcLaLe
performance and obllgauons of all parues and also uses of cash
ows of pro[ecL
So.. WhaL Lype of compensauon sysLem wlll mouvaLe Lhe CLC
Lo maxlmlze shareholders value?
33 20/06/14 A!C Case ulscusslon PandCuLs
WhaL Lype of pro[ecL CLC Works for ?
LlmlLed llfe asseLs
Company wlll dlssolve and CLC wlll be ouL of [ob
A!C a prlvaLe company - noL llsLed - no sLock opuons
LlmlLed upslde - conslderable downslde
no markeL dlsclpllne -
lallures wlll be vlslble ouLslde world
Puman & nanclal caplLal aL rlsk lf pro[ecL falls
34 20/06/14 A!C Case ulscusslon PandCuLs
WhaL are Lhe 8esponslblllLy of CLC?
Semng up Lhe company, maklng sure consLrucuon proceeds and
compleLed qulckly smooLhly ls very lmporLanL
8unnlng Lhe pro[ecL company and supervlslng and lmplemenung do
noL requlre same level of sophlsucauon or sLraLeglc Lhlnklng
Cnce pro[ecL ls compleLe - CLC only need Lo manage day Lo day
operauons and Lry Lo sell lncremenLal capaclLy - harvesL
Lxecuuon ls lmporLanL over sLraLeglc declslon maklng
So whaL Lype of lncenuve?
llaL, reward on ume compleuon, sales performance based ln early year,
operauons performance based.
uo you Lhlnk Lhe compensauon packages and monlLorlng are sumclenL
Lo ensure mangers maxlmlze shareholder value?
33 20/06/14 A!C Case ulscusslon PandCuLs
CaplLal SLrucLure can also be used Lo dlsclpllne
Lhe managers. 1he levers are
AmounL of leverage
LxLenL of CovenanLs
8eporung requlremenLs
36 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
7
So WhaL klnd of debL ensures cash ow dlsLrlbuuons?
Senlor bank debL wlLh early paymenLs forces manger Lo ensure early revenues and sales
Zero coupon debL - managers may dlsgorge free cash ows
Amoruzlng debL ls more eecuve Lhen bulleL paymenL
ShorL maLurlLy-Amoruzlng and Cash pay
WhaL ls role of CorporaLe debL v/s ro[ecL debL ln dlsclpllnlng Lhe manager?
CorporaLe debL noL as eecuve Lo dlsclpllne manager
ro[ecL mangers wlLhln corporauon have safeLy neL
SeparaLe legal corporauon reduces lnformauon asymmeLry
WhaL oLher feaLures of debL would be useful?
Cash waLerfall
CLher conLracLual sLrucLures
Loan agreemenL place resLrlcuon or ask for approval for addluonal borrowlng- lnow,
ouulow- capex and dlvldend
uebL holders requlre perlodlc updaLes on performance and reporung
37 20/06/14 A!C Case ulscusslon PandCuLs
ro[ecL Company SLrucLure
Crganlzauon- Lo monlLor behavlor
ConLracLual- Lo dlcLaLe behavlor
Cwnershlp- Lo monlLor behavlor
8oard of ulrecLors -ulcLaLe sLraLegy and monlLor
behavlor
CaplLal- MonlLor behavlor and force
cash dlsLrlbuuons
38 20/06/14 A!C Case ulscusslon PandCuLs
!"#$%"$#&'
()#*+$",

-+.,%/0,

23&#&%",#*4/%4

5,"&*'4

Crganlzauonal

MonlLor behavlor

S e p a r a L e
lncorporauon
use pro[ecL nance

Allows for Lhe creauon of new
governance

laclllLaLes monlLorlng

ConLracLual

ulcLaLe behavlor
(esLabllsh rules)

r o[ ecL specl c
conLracLs
llnanclal conLracLs
and covenanLs

8educes hold-up problems (landlng
sLauons conLracLs)
Lnc our ages opumal behavl or
(employmenL conLracLs and loan
covenanLs)
ulcLaLes borrower behavlor

Cwnershlp

MonlLor behavlor

4 L o 6 e qul L y
sponsors

Solves hold-up problems by allgnlng
lncenuves
rovldes lncenuves Lo monlLor (avold
free rldlng)

8oard of
ulrecLors

ulcLaLe sLraLegy and
monlLor behavlor

lew dlrecLors
r l ma r l l y g r a y
dlrecLors

MonlLors managemenL and dlsclpllne
managers
8educes free cash ow problems

CaplLal

MonlLor behavlor, lorce
cash dlsLrlbuuons

Pl g h l e v e r a g e
(83)
ShorL-Lerm bank
debL
Senlor, amoruzlng
debL

Lnforces good managemenL behavlor
8educes free cash ow problems
ConcenLraLes ownershlp and reduces
Lhe requlred lnvesLmenL commlLmenL
8e-ln forces [olnL ownershlp and long-
Lerm conLracLs

39 20/06/14 A!C Case ulscusslon PandCuLs
Secuon 3
Cvervlew of ro[ecL Company SLrucLures
WhaL has been Lhe A!C pro[ecL SLrucLure
40 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
8
Structure Characteristics
Organizational Used Project finance, separate legal incorporation of the
project company
Total corporate staff in Bermuda is ~15 people (lean)
Contractual Signed detailed contracts with landing station owners
CEO compensation: base salary plus bonus based on
successful execution and market sales (low-powered
incentives)
Ownership Short-term, amortizing bank loan; 12 banks in the
syndicate
Covenants included VAR (value at risk) and coverage
ratios (interest coverage or EBITDA coverage).
6 equity sponsors: .. See next page
AJC Project Structure
42 20/06/14 A!C Case ulscusslon PandCuLs
6 equity sponsors: cont..
Telstra 39.9% Concert Global 10.1%
Teleglobe 15.0% NTT 10.0%
Japan Telecom 15.0% WorldCom 10.0%
Board of 6 directors, one director from each sponsoring firm;
Directors one vote each.
Meet quarterly; re-appointed annually.
Capital Debt-to-Total capitalization ratio = 85%
43 20/06/14 A!C Case ulscusslon PandCuLs
2,#"&*6 7,&"$#,4 2#,&", "3,
89",6/&' :9# 294"'; (<,6%;
296=*%"4
1) High Operating margins,
cash flow
2) Relationship-or transaction-
specific use
-"3,# :,&"$#,4 7&%*'*"&",
"3, >4, 9: 8#9.,%" 7*6&6%,
1) Tangibility
2) Econ. Independence
3) Limited life-no growth
4) Low asset risk
5) Size (absolute)
CosLly Agency ConlcLs
1) Free cash flow
2) Opportunistic Behavior
(Hold-up)
ro[ecL SLrucLure MlugaLes
CosLly Agency ConlcLs
1) Contractual Structure
Establishes rules
2) Ownership, Board, and
Organizational Structures
Enhances monitoring,
control, and enforcement
3) Capital Structure
Forces cash distributions
lramework for Selecung ro[ecL AsseLs
43 20/06/14 A!C Case ulscusslon PandCuLs
WhaL Pappened?
2/00 Slgn shareholders agreemenL, lncorporaLe Lhe pro[ecL

6/00 Close $320M nanclng and execuLe cable supply conLracL
u/1C = 83
expecL ready-for-servlce" (8lS) daLe of 6/30/01

1/01 8egln laylng cables

11/01 CompleLe consLrucuon under budgeL (8lS daLe 11/01)
1ransmlL rsL cusLomer daLa (12/30/01)

2002 lndusLry: capaclLy up!prlces down!bankrupLcles
Clobal Crosslng (!anuary)
lLAC 1elecom (Aprll)
1eleglobe (May)
WorldCom (!uly)
aclc Crosslng (!uly)

46 20/06/14 A!C Case ulscusslon PandCuLs
20/06/14
9
3/03 SouLhern Cross Cable compleLes nanclal resLrucLurlng

6/03 (?2 4*<64 & @4"&6A4/''B &<#,,C,6" D*"3 *"4 ',6A,#4
markeL rlsk" Lranche ls aL rlsk

9/03 1elsLra wrlLes o lLs equlLy lnvesLmenL ln A!C

12/03 (?2 %9CE',",4 & F6&6%*&' #,4"#$%"$#*6<
nlshes second year wlLhouL a servlce-lnLerrupung faulL

12/03 C2C Cable negouaung wlLh lLs lenders

1/03 lndusLry remalns ln very Lough shape

03/10 upgrade compleLed on ume and on budgeL, brlnglng LoLal equlpped capaclLy Lo 160+160
CblL/sec and conrmlng a deslgn capaclLy lncrease Lo a maxlmum of 2.36 1blL/sec.

06/13 Achleved 100 annual avallablllLy of proLecLed capaclLy slnce 2002

47 20/06/14 A!C Case ulscusslon PandCuLs