IPBC gets some financial backbone

PCCW and Telstra''s internet backbone JV starts some serious sub-underwriting of its $2 billion loan.

Lead arrangers of the inaugural $2 billion project financing for Internet Protocol Backbone Company (IPBC) say the sub-underwriting of the loan is going well. Barclays Capital and Chase Manhattan flew into Sydney for seven hours on Monday to make a presentation to 14 banks and then jetted back to Hong Kong today, Tuesday, to make the same presentation to 25 other banks.

These meetings were where the company had a chance to fully explain who and what it is to prospective lenders. The company is a 50/50 joint venture between PCCW and Telstra which has assets of around $6 billion. The company has ownership and right of use of over 50 different undersea internet cables around the world, in what is described as "a comprehensive network which has significant operating upside".

Nevertheless, the internet backbone business is a different credit prospect from PCCW's other loan in the market at the moment for Hong Kong Telephone Company (HKTC) - its subsidiary which owns PCCW's Hong Kong fixed line telecom assets. IPBC operates in a market which is unregulated and subject to international competition, but which has high growth potential all the same. Nearly every analyst around the world agrees that internet traffic will continue its meteoric rise.

Potential lenders, however, might be somewhat alarmed at the recent news surrounding the company's SE-ME-WE3 cable that links Australia to South East Asia, the Middle East and Europe. Last week the cable snapped under the sea off Singapore and internet traffic from Australia was disturbed for several hours. However, bankers close to the company stress that this is actually a good thing, as it shows that within a few hours internet traffic was rerouted onto different IPBC cables, which showed the effectiveness of their network.

The $2 billion loan is non-recourse to the company's two shareholders. It is split into three tranches: a three-year, $400 million tranche priced at 50 basis points (bp) over six month Libor; a five-year, $1.1 billion tranche priced at 65bp over Libor; and a seven-year, $500 million tranche priced at 80bp over Libor.

The maturities and spreads closely match the loan being underwritten for HKTC, which is somewhat surprising given the different credit profiles of the two borrowers. This suggests that the loans are being offered as much for relationship purposes as they are for profit. This suggestion is reinforced by the fact that PCCW and Telstra hand picked all the banks that attended the IPBC syndicate meetings in Sydney and Hong Kong, rather than the usual practice of allowing the banks to sub-underwrite the deal. The lead arranging banks report that they are considering a more general syndication in the New Year.

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