Project Finance for Autopistas del Centro – Case Solution

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Project Finance for Autopistas del Centro Case Answers

I. Introduction – Autopistas del Centro (AC)

Autopistas del Centro (AC) is a private Spanish firm that specializes in the operation of a toll road bypass in Madrid. Founded as a legally independent stand-alone project company sometime in 2004, the company’s sole purpose was to build and operate a toll road under a twenty-year concession from the Spanish central government.

The freeway itself was planned to be a 23-kilometer stretch, offering a quick alternative way to avoid heavy traffic within the northern area of Madrid, especially on peak days like the weekends and holidays.

Therefore, the bypass seemed like a feasible solution to the mass traffic congestion during peak times and weekends in one of the largest metropolitan areas throughout Europe. Tolls were agreed upon with the Spanish Government in the concession contract.

In terms of the project of Autopistas del Centro at hand, the construction started in 2005, and subsequently, its operations began in 2007. An initial investment of around € 60 million was spent on the construction of the freeway. This was financed through both a temporary corporate finance agreement in the form of a credit facility from a pool of banks and an equity stake of three different shareholders.

The equity shareholder structure consists of three private companies. These are the Infrastructure del Futuro (40%), Coinfrasa (25%), and Infravest (35%). Ideally, the first two private companies (Infrastructure del Futuro and Coninfrasa) were in charge of the construction, whereas the latter (Infravest) was dealing with the operation of the freeway.

In late 2009, the company and its CFO, Osvaldo Martinez, were facing growing concerns due to heavily declining revenues and operating earnings. It is because the company was experiencing a breakdown in the total traffic amount on its toll road. CFO Osvaldo Martinez found the decline unexpected.

Nevertheless, he had to come up with solutions to this ongoing issue (the trend did not suggest any improvement in the near future), as the fall in revenues could finally threaten the existence of Autopistas del Centro itself.

Here, the case at hand steps in and tries to evaluate the alternatives for the company to ensure generating enough cash flows to meet the interests of all financial parties involved and, thus, to ensure the future sustainability of the company.

First, the general situation of the project until mid-2009 will be assessed with a focus on financial terms and the economic development in Spain. The situation of mid-2009 will then be compared to the situation of the project at the very beginning of 2004.

Why should the project be undertaken? What are the opportunities and threats when realizing the AC project? What are the project returns in the initial and the revised business plans, and how does it impact the project’s profitability?

Next, alternatives to a proposed sale of the project to a new operator are discussed. Which options should Autopistas del Centro choose to guarantee the project’s viability in mid-2009?

Finally, a possible sale of the project itself to a new operator will be assessed with the purpose of finding a reasonable price at which the interests of both parties involved in a potential sale (current shareholders and the new operator) are satisfied.

II. Assessment of the project situation (until mid-2009 and 2004) and discussion of initial and revised business plan

The general situation of Autopistas del Centro was good until 2008. Exhibit 3 indicates that after 2006, the expected total free cash flow (FCF) would constantly increase year by year until 2026. The reason for a negative total FCF up to 2007 was due to the…