Innovative financing structures for submarine cables

Overall, the group was modestly, but not overly positive on the near future of financing non consortium cables. A slight majority of the attendees were neutral on future opportunities, with a little less than half, optimistic. None were pessimistic. 

The group generally agreed that consortium cables had a viable future role and would co-exist with non-consortium cables. Specifically, consortium cables do best in complex multi-faceted situations involving multiple landing sites. But, consortium cables are generally more complicated than other cables and difficult to manage due to the differing interests of its members. We expect to see substantial adaptations to the traditional consortium models. Outside of large multi-location facilities, binary location and niche location cables were generally considered better opportunities for financing non consortium cables. 

The group initially recognized the increased role of OTTs in the sector was a game changer and, we expect that trend only to magnify. We did not consider their evolving presence to necessarily be a positive or negative factor, rather, the group considered the OTTs as “Frenemies”. While in certain cases they deprive traditional operators of some revenue streams, they generate new and different forms of competition and grow new markets. Moreover, they breathe new life in the subsea cable sector and in any case they are now an immutable reality in the sector. 

 

Investors look at OTTs somewhat differently than they perceive other users. Given these debt investors’ heavy focus on pre-sales, they are comforted by the predictable revenue stream of OTTs. Equity investors, in contrast, are more nuanced, and while preferring higher revenue streams from non OTT customers, recognize the importance of OTTs in attracting debt investors—a key predicate for equity investors. The group agreed that submarine cables could be funded without OTTs, but that most new cables would involve OTTs. Furthermore, the group discussed the various ways OTTs are different from other customers, generate different and lower margins and relate differently to other cable customers. 

 

Generally, the group agreed that securing one or more large contracts from OTTs was a highly positive factor in raising financing. Maybe the most critical factor. But, to be more precise, this is financing from third parties. The groups’ collective experience was that OTTs are rarely a source of direct financing for developers of new private cables. 

Much of the discussion turned on the fact that in recent years, multiple subsea cables have been financed by private equity firms and even, for certain limited and discrete facilities, a few by venture capital. Private equity funding is definitely back and should we believe continue apace. These private equity investors are generally more interested in terrestrial backhaul than subsea assets, but there is still, no doubt, increased private equity interest in subsea assets as well. Generally, these private equity interests are concerned with holding the asset for 3-5 years and then looking for an exit. Identity of an exit strategy animates the investment thesis. The private equity firms are encouraged that there are now increased financial and strategic buyers. We discussed Hibernia as just such an example. 

 

We also discussed the recent interest of Infrastructure Funds in submarine cables. These entities generally have longer holding periods than private equity firms and generally tolerate less risk. The emergence of these infra investors was generally considered highly favourable, as it suggests that subsea cables are emerging perhaps as a new asset class. The group predicted that this development will be even more commonplace in the next few years. 

 

Several group members discussed, especially in developing markets, the critical role of development banks and other non-traditional lenders. We expect this involvement also to remain strong. These investments often complement more traditional debt and equity financing. 

 

Finally, we discussed the history and role of Vendor/Supplier financing. It was generally agreed that such financing was, as a rule of thumb, more challenging now than in the recent past. 

 

Overall, the group touched on many creative and innovative forms of submarine cable financing. 

Andrew Lipman was a speaker at Submarine Networks Europe in London. The event, organised by Total Telecom, will be back in 2019, find out more at www.totaltele.com/subnets