Question

National Broadband Network operator NBN Co has secured $6.1 billion in debt finance on external markets as part of the company’s inaugural long-term borrowing from private debt markets.

The new credit facilities each have a five-year term as the company looks to support its future financing needs after the Federal Government had flagged some time ago that it expected NBN Co to pursue debt financing through external markets, including in order to start the process of re-financing its loan with the Commonwealth.

Finance Minister Mathias Cormann said that the strong interest on private debt markets to support the future financing needs of NBN Co demonstrated that there was strong support in the market for the NBN business plan and outlook.

“NBN Co approached the bank market with a request for an initial $2.0 billion, as foreshadowed in its 2020-23 Corporate Plan. Given the positive response from the market, NBN Co has secured additional lines of credit totalling $4.1 billion at very competitive prices,” Senator Cormann said.

“There is no requirement for NBN Co to draw down on these additional facilities immediately, but the Government agrees with the company that it makes sense to have these facilities in place, to give it flexibility and given current economic conditions.”

Minister for Communications, Cyber Safety and the Arts, Paul Fletcher, said that NBN Co is at a “pivotal point as it nears network build completion and prepares for its next phase of operations as a self-sustaining telecommunications wholesaler”.

“The company has entered into arrangements with a number of Australian and international banks to secure funding through private debt, complementing Commonwealth Government funding capped at $49 billion,” Minister Fletcher said.

“NBN Co is expected to draw down $2.0 billion from the $6.1 billion raised and complete the build within its $51 billion funding envelope, as set out in its 2020-23 Corporate Plan. The additional funding will provide the company opportunities to invest and create even more value for Australians guided by future Corporate Plans.”

Analyse the systematic and unsystematic risk that NBN should consider.

Assess and discuss different capital financing (sales of assets, bonds and equity) to facilitate the acquisition of NBN.

Answer 1

(A).

Normally, the business has to face with two broad risks namely systematic risk and unsystematic risk. The systematic risk is defined as market risk which cannot be eliminated by diversification. Normally systematic risk comprises of interest rates, inflation, war, recession, market crashes and any changes pertaining to the macroeconomics. In case of NBN, the business has undertaken many debt financing. Now such servicing of such financing arrangements depends on the prevailing interests rates. Any adverse changes in interest rates makes the loan servicing by NBN to be either difficult or easier. Such adverse movements in the interest rates are termed as interest rate risk. The interest rate risk normally rises with the changes in the dynamics of macro-economics which therefore can be classified as the systematic risk for NBN. Additionally government visualizes some levels of impact that the business may have to check is in the form of economic changes.They should consider interest rate risk as well as economic changes as a measure of systematic risk. The unsystematic risk can be classified as the risk which are pertinent to the firm or they can be regarded as residual risk as well as company specific risk. Unsystematic risks are generally reduced by the means of diversification. In case of NBN, they face unsystematic risk in terms of determination of the fair asset price of the Asset. The business has taken several external finances along with partial equity from the government which may caused the saleable value or the fair value to deteriorate. Though NBN enjoys full support in terms of their outlook and business plans the unsystematic risk for the business remains to be under control.

(b).

The NBN seems to be valued at somewhere around $12 billion to $15 billion as determined in terms of overall net present worth. More of the financing choice depends on how financially strong is the business NBN. Basis the business size of the NBN , government owned whole sale network it would require good level of money on the plate which would be helped using in the form of debt financing by initiating a leveraged buyout. If still some short fall persists to meet up the acquisition of the NBN then prospective business can also go for equity financing.