Eastern Light Nordic Subsea Project Becomes A Distressed Asset

The private credit company P Capital Partners has ousted this ambitious project's founders and seized control. 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 company's 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 generally finance projects that already are generating significant cash flow so that the monthly  loan 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 in order 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. Now it is true that the banks are willing to finance large real estate construction projects. But telecom is a niche market where banks lack expertise. Hence equity or self financing is the usual path for subsea or terrestrial fibre optic builds. 

Eastern Light's prior management apparently 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? 

Start up founders often focus too much on keeping as much ownership 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  nothing. In many cases entrepreneurs never get their projects financed because they insist on a high equity price to reduce their equity dilution. I've encountered this many times. 

I had misgivings about this project because the huge cost, which I estimate to be is up to a billion Euros, required very deep pocket equity investors. The new owner is an equity fund that specializes in distressed situations where the current management is deposed. My guess is that the new owners will complete the current second cable linking Sweden and Finland and call it quits. I doubt the rest of the project comes to fruition. Such a project would require a lot of capital and that means a lot of risk for the equity investors. In general, investors like to diversify. This means that the percentage of their net worth devoted to any given project must be relatively small.