Pacific Fibre 'very open' on how ANZ raises about US$180 mln of debt for its undersea cable

By Gareth Vaughan

Pacific Fibre, the company that aims to have a new undersea cable system connecting Australia, New Zealand and the United States in place by the end of 2013, is "very open" on how it raises about US$180 million of debt to help fund the project and will leave this to lead arranger ANZ.

Mark Rushworth, Pacific Fibre's CEO, told interest.co.nz the total of US$400 million (NZ$504.3 million) the firm is seeking to raise will be enough to see the cable built. ANZ will oversee the debt raising for the project and Credit Suisse and First NZ the equity raising.

Rushworth expects about 45% of the money raised to be debt, but says this is not a hard and fast figure.

"We might decide to do a layer of mezzanine (debt) or some of the vendors might come back with options for vendor financing, which is effectively a layer of debt and would mean we need less equity. So there’s a bit of flux there," said Rushworth.

The key was to secure the lowest cost of capital for the project and to be prudent. As to how the debt was raised, such as borrowing from banks or bond issues, even to retail investors, Rushworth has an open mind.

"We’ll leave that to ANZ. They’re the lead arranger."

"We certainly wouldn’t rule anything out. Everything’s on the table to look at and we’ll see what makes sense and what the appetite is across different products," said Rushworth.

How much will ANZ's 'significant portion' be?

ANZ says it will  provide a "significant portion" of the money Pacific Fibre needs to raise and also arrange for other Australian and international banks to stump up funding. Neither ANZ nor Rushworth will comment on how much the bank's "significant portion" might be.

Rushworth said Pacific Fibre, which was founded last year, has previously raised just NZ$6.6 million. Its shareholders include Trade Me founder Sam Morgan and his father Gareth, the Warehouse founder Stephen Tindall, PayPal co-founder and Facebook shareholder Peter Thiel, Rod Drury the founder and CEO of Xero, ex-All Blacks captain and former Fairfax Media CEO David Kirk, Internet entrepreneur and consultant Lance Wiggs, and Rushworth. The directors are Sam Morgan, Kirk and Drury.

New Zealand Trade and Enterprise has contributed about NZ$250,000 towards feasibility studies.

With the cable to start in Australia and end in the US, with two fibre optic cables via New Zealand, Rushworth said that gave a good idea of where the bulk of new shareholders were likely to come from. That said, he was also expecting strong interest from Asia and expects to target both institutional investors and individuals.

Pacific Fibre's cable will compete for business with the Southern Cross Cable Network, which links New Zealand to Australia, Hawaii and the mainland US. It is 50% owned by Telecom, 40% by SingTel Optus and 10% by Verizon Business. Telecom received a NZ$39 million dividend from Southern Cross in the six months to December 2010, down from NZ$44 million in the same period of 2009.

'Massive amounts of growing demand'

The Pacific Fibre business case is based on "massive amounts of growing demand" Rushworth said, off the back of a 64% compound annual growth rate (CAGR) in the Australasian market over the past five years.

"A few years of that and you soon realise the existing supply starts to become quite constrained," he added.

There was both existing demand and latent demand, plus a supply constraint around price out of New Zealand because there’s only one cable.

"You look at what is fibre to the home going to do in Australia (via the government's National Broadband Network project) and ( through the government's) ultra fast broadband in New Zealand? Are we going to see the same kind of kicker that we saw when people moved from dial up (internet) through to DSL broadband? I’m imagining we’re probably going to see the same if not more (of an) increase," said Rushworth.

He said the company wouldn't have secured the services of ANZ and Credit Suisse if they didn’t believe Pacific Fibre had strong customer support and a strong business case. Asked if Pacific Fibre was, or would, try to hit up the New Zealand and Australian governments for funding, Rushworth said discussions were underway with "a whole bunch of different customers" on both sides of the Tasman. One customer that is confirmed is Asian cable operator Pacnet, which had originally planned to help fund Pacific Fibre's cable.

Rushworth noted that for New Zealand having another cable available could be useful in times of natural disasters.

"This was highlighted in Japan where the tsunami took out four of the eight cables and caused massive problems. Of course New Zealand has only got the one cable so diversity is a big issue."

In the first couple of years he expects New Zealand telcos to switch a significant amount of their traffic to Pacific Fibre from Southern Cross for diversification purposes.

Rushworth wouldn't say when the company expects to be profitable saying this was commercially sensitive. Nonetheless he predicted Pacific Fibre would be of significant assistance to New Zealand trade with the rest of the world.

"You look at countries that do have competitive markets for international bandwidth, what it does for things like commerce, trade, exports everything else. So we’re looking forward to bring a competitive market to New Zealand for international bandwidth," said Rushworth.

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