Pipe Networks funding bid fails

Kordia partner's cable plans now in doubt

Pipe Networks bid to build an under-sea fibre link between Australia, the US and Asia is now seriously in doubt, with the company going into a trading halt following a failure to secure the finance from ANZ and Westpac to complete the ambitious project.

The project, known as PPC-1, which would offer Australian businesses a direct broadband link overseas, is already well advanced. Pipe has also partnered with New Zealand company Kordia in a proposal to build PPC-2 linking Australia and New Zealand.

On December 2, when Pipe warned the ASX funding for its project might be conditional, Kordia said it remained confident the trans-Tasman cable would go ahead.

Pipe Networks CEO Bevan Slattery told the Australian Financial Review in August that the company already had enough customers signed up to ensure the project would at least break even.

A statement released to the Australian Securities Exchange late on yesterday, however, said that the subsidiary Pipe had set up to run the PPC-1 project had withdrawn from the proposed arrangements with financiers and was negotiating with key customers and its major supplier with a view to arranging alternative financial solutions. It expected to release a further statement to explain the situation on Thursday.

Referring to a recent study conducted by Pioneer Consulting, the Pipe statement said demand for future capacity remained robust, with a prediction that by 2012, PPC-1 should be able to achieve a 22% share of the incremental international wholesale capacity market connecting Australia.

A financial analyst, who has been closely monitoring the project, said he believed that the worrying news was not a death knell for the project. He said that it was unlikely that Pipe would have pulled the pin on its negotiations with the bank if it didn't have a robust "plan B".

He said the company had two options: to either negotiate with its supplier VSNL International to delay its ongoing payments until the Pipe was completed, or to negotiate with its customers to start paying monthly progress payments until the project was completed.

"It is definitely a risk that the project will not go ahead as nothing is a done deal, but I think it is more likely to go the other way," the analyst said.

He said that previously the indefeasible right of use payments would have been paid to Pipe from its customers 30 days after the cable was switched on and would have covered the financing debt. He suggested that Westpac had agreed to the financing deal, but ANZ, as the larger part of the deal, had been "dragging the chain".

"They were meant to have an answer from the banks by the first of November and I think they had probably reached a point where they said they needed it by the First of December or would go with their other options," he said.

If the project was cancelled and Pipe was forced to write off its investment, it would result in a one-time non-cash write off of approximately A$30 million.

— Australian Financial Review

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