Eastern Light Nordic Subsea Project Becomes A Distressed Asset

 Eastern Light Subsea Cable Project Becomes Distressed Asset

The private credit company P Capital Partners has ousted this ambitious project's founders and seized control of its assets. It appears P Capital extended a loan to finance Eastern Light back in 2021. As is standard, the debt covenants probably included the right to oust management and become the company's owner if certain conditions were not met. The new owners specialize in offering high interest rate, loans so that companies can avoid equity dilution. According to the press release, prior management was unable to meet the key requirement of new equity financing. Hence they were fired.

It is important to understand how these greenfield projects work. Generally, founders invest money in the project as equity. Since these projects are unlikely to generate cash flow for many years, equity is the appropriate financing. The project is high risk and can only be justified if there are high returns.  Banks and other credit providers finance projects that already are generating significant cash flow so that the monthly credit payments can be met. So debt is not the right financing choice. But that is exactly what happened. The creditor P Capital Partners required an equity injection into the company as the condition of its loan to reduce its own risk exposure. My guess is that P Capital offered debt financing with a deferred payment schedule and perhaps the right to convert the debt into equity if the covenants were broken. 

Eastern Light's prior management took the very risky approach of incurring debt. Since the company has limited revenues, it quickly needed equity, but was unable to get it. There are lots of questions that must be asked. Was there simply not enough equity investor interest to finance the project? Or did the founders unwisely take the loan in hopes of achieving construction and revenue milestones and getting equity later at a high price and retain greater ownership for themselves? 

Startup founders often focus too much on keeping as much of the company as possible. To do so, they try to borrow as opposed to selling ownership in the company. This strategy almost invariably backfires for construction projects because there are huge expenses upfront and no revenue for many years. Founders need to understand that owning 5% of a successful company is better than owing a 100% of zero. In many cases entrepreneurs never get their projects financed because they insist on a high equity price to reduce their equity dilution.  

I had misgivings about this project because the huge cost, which I estimate is up to 500 million Euros, required deep pocket equity investors. The new owner is an equity fund that specializes in distressed situations where the current management is booted out. My guess is that the new owners will complete the current second cable linking Sweden and Finland and then call it quits. I doubt the rest of the project comes to fruition.