Ajc Case Analysis - Question 2

Q 2) Who provide capital to the AJC project? Are they likely to earn an appropriate risk adjusted return on their investment? What potential problems could arise that would prevent them from earning a return on their invested capital?

Capital providers

The capital for the project would come from the sponsors and consortium of banks with a fairly high financial leverage (85%). The sponsors were selected on the basis of good chemistry between the firms and the individuals,sponsors that would be both investors and users (capacity buyers) in roughly same proportion, as well as having strong financials so that their presales capacity contracts would support the project and give us credibility with bankers. In addition, the sponsors should be equipped to bring significant volume and/or access to landing stations.

The original sponsors which provided capital the AJC project were Telstra, Japan Telecom and Teleglobe with additional potential sponsors of AT&T, NTT and MCI WorldCom. As we can see in exhibit 7a and 7b, the sponsor's profit and loss statements are summarized, such as their balance sheets.

Furthermore, to obtain their target debt structure they wanted to raise 2 debt tranches:

• Senior debt: Repayments would come from presale commitments.

• Junior debt: Repayments would come from future sales of capacity.

Potential problems preventing return on their capital investment

When starting a new project it is important for AJC to mitigate both external and internal risk.

Internal risk can be mitigated by organizing and structuring their internal processes related, but not limited, to budgets, sponsor deals, detail planning, contracts, knowledge within employees, operational risk (lean production) and choice of strategical partners.

When it comes to the choice of strategical partners, one should focus on

1. High expertise level of cable suppliers (not an issue for the AJC project  as the suppliers have been laying submarine cables for 150 years)...