BUSINESS AND CORPORATE FINANCE (BBAC602)
WRITTEN REPORT DUE: WEEK 5 SESSION 2
PRESENTATION AND ORAL EXAM: WEEK 6 SESSION 1
Learning Outcome Assessed: a - f
Group Size: 2 Members
Weighting: 25% (Report 15% + Oral Exam / Presentation 10%)
Written Report Case Study Analysis (2000 words)
Bidding for a large infrastructure project – Understanding project evaluation techniques, building a project evaluation model and determining the capital structure
You are the senior portfolio manager of a major infrastructure fund, CKI Infrastructure Group that is invited to participate in a Public Private Partnership transaction that involves building a major toll road connecting the Eastern Freeway with the other major toll roads. Currently, traffic from the Eastern Freeway flows into a busy arterial road causing significant congestion. The new toll road will provide an important link in the overall traffic network. Your infrastructure fund has formed a bid consortium that includes a global road building company, a road maintenance and services company, a major Australian bank and a consulting firm.
The State Government will provide a concession agreement that allows the winning bidder (i.e. concessionaire) to collect tolls at a regulated rate over the concession period of 25 years from the date of completion of the project. The State Government has agreed to provide the concessionaire with a “credit wrap” (or financial guarantee) of up a total of 30% of the project value for project finance debt with a maturity up to 5 years
The concession agreement requires the bid group to contribute equity of a minimum of 30%.
It is estimated that the construction will take around two years and for the purposes of our analysis, we assume that all cash - flows during a period occur at the end of the period.
The State Government is rated AAA by global rating agency Standard & Poors and your banking partner estimates that the residual project debt is rated BBB (flat) based on S&P rating methodology.
For the purposes of this analysis you will assume a “flat term structure” of interest rates or interest rate swap curve of 8%. Your banking partner has estimated the following credit spreads over the inter-bank swap rate:
1. AAA rated debt = 0.25 %
2. BBB rated debt
a. Where debt component is between 50% - 70% of project value = 3.5%
b. Where debt component is between 30% - 50% of project value = 1.5%
They have offered to provide an interest rate hedge to lock in the interest rates at this level if deemed appropriate by the bid team. They would also be willing to offer credit facilities to help the project lock in any foreign exchange or commodity price risks.
Key parameters of the project as determined by your consultants are outlined below:
Project Costs: Year 0 – Bid Costs capitalised – A$ 15 million
Year 1 – A$ 300 million
Year 2 – A$ 350 million
Hence the total project value is estimated at A$ 755 million
Approximately 50 million of project costs is towards the purchase of bitumen or Asphalt for road building. Bitumen is a sticky, black and highly viscous liquid or semi-solid form of Petroleum. The price of bitumen often correlates with the price of Oil.
The Project costs also include an amount of around A$100 million towards of steel girders that are to be imported from China.
Interest costs on the bank loan during the construction process are capitalised and included in the total amount of A$ 755 million calculated above. Interest costs for the period of the concession agreement will be based on your capital structure and type of debt employed. You are also provided with the following cost structures:
1. Annual Expenses other than Bank Interest costs – Estimated at A$ 10 per annum
2. Bank Interest Costs – As calculated by you based on debt structure employed
3. Annual Toll Receipts as outlined below:
• Year 1 of the concession period – A$ 100 million
• Year 2 of the concession period – A$ 110 million
• Year 3 of the concession period – A$ 120 million
• Year 4 of the concession period – A$ 130 million
• Year 5 onwards to year 25 – A$ 140 million
4. At the end of the concession period, ownership of the toll road will be handed over to the State Government at no cost.
The bid group has agreed on an internal hurdle rate of 15% for the purposes of evaluation of this project.
In bidding for the project, you are required to provide the State Government with an estimate of either how much you expect the State Government to pay you (upfront) as a subsidy or How much you are willing to pay the State Government in consideration for taking up the concession agreement. Important note to students:
1. This is a group assignment and the key focus is on ensuring you understand the financial concepts – You are required to discuss key issues among yourselves and develop a detailed excel model for calculating the project NPV.
2. Aspects of the assignment will be discussed during tutorial sessions to assist you in the learning process.
3. You can also avail the time allocated for student consultations to get a better understanding of project related issues.
1. Based on the information provided in the case study, you are required to make a recommendation on the following: a) The optimal capital structure,
b) Innovative means of financing the project, a rough debt maturity profile and proposed refinancing strategy after 5 years. Discuss the merits and limitations of each form of financing proposed. (5 Marks)
2. Discuss briefly some of the financial market risks associated with the project. Consider: Interest Rates, Currency and Commodity Risks if any. How can these be hedged using and what financial instruments do you propose to use, if any. (5 Marks)
3. Develop a detailed NPV model in excel showing Cash Inflows, Cash Outflows and NPV of the project. What is the amount that you either expect to receive or are willing to pay the State Government to win this concession. Provide your arguments. (5 Marks)
Part B will consist of an Oral Examination and Presentation.
Assignment Marking Guide:
The following assignment criteria are designed to give the student a guide as to what markers are looking for in the assignment:
PART A - Written Report – 5 Marks per Question – Total 15 Marks
1. Quality of research and analysis undertaken and overall presentation, formatting and referencing of the report
2. Evidence of understanding of the various Project evaluation and risk management techniques.
3. Creativity and innovation in development of the Capital Structure and Project and
Risk Management Strategy (4 – 5 Marks) – A very high level of achievement in all three key assessment criteria
(3.5Marks) – A high level of achievement in all three key assessment criteria
(3 Marks) – A high (or better) level of achievement in two criteria and a good level of achievement in the third criteria
(2.5 Marks) – A good level of achievement in all three criteria
(2 Marks) – A good level of achievement in two criteria and a light level of achievement in the third criteria
(1.5 Marks) – A light level of achievement in all three criteria
(1 Mark) – A light level of achievement in two criteria and a very light level of achievement in the third criteria
(0.5 Mark) – A very light level of understanding in all three criteria
(0 Marks) – No attempt was made to present & estimate.
Part B – Presentation & Oral Exa m (Individually Assessed)
1. Demonstrates understanding of the presented material
2. Presents thoughts in a clear and concise manner
3. Demonstrates ability to interact in a group (8 – 10 Marks) – A very high level of achievement in all three key assessment criteria
(7 Marks) – A high level of achievement in all three key assessment criteria
(6 Marks) – A high (or better) level of achievement in two criteria and a good level of achievement in the third criteria
environment (5 Marks) – A good level of achievement in all three criteria
(4 Marks) – A good level of achievement in two criteria and a light level of achievement in the third criteria
(3 Marks) – A light level of achievement in all three criteria
(2 Marks) – A light level of achievement in two criteria and a very light level of achievement in the third criteria
(1 Mark) – A very light level of understanding in all three criteria
(0 Mark) – Unable to demonstrate any level of understanding in any of the three criteria.