Autopistas del Centro operates a toll road bypass in Madrid. In 2009, Osvaldo Martínez, its Finance Manager, was concerned with the economic effect of the decrease in traffic on its toll road. A year before, national freeway traffic dropped down by 12% and such downslope courses did not change in 2009. This decrease heightens the risks of the business which, in turn, forces the company's lenders to review and change the project costing and deadlines. Such a drop in the financial gain led to a need for an additional two million euros for the project. This case presents the project from its inception in 2004 and how it should deal with the financial crisis it is facing in 2009.
Francisco J. Lopez Lubian
Harvard Business Review (NA0266-PDF-ENG)
July 01, 2013
Case questions answered:
- Assess the situation of the project until mid-2009. Make sure to discuss the pros and cons of the project at initiation in 2004, the project returns in the initial business plan, and the effect of the revised business plan on the project’s profitability. Note that calculations are not required for this question, instead, the case information in text, tables, and exhibits should be analyzed and discussed.
- What are the companies options to make the project viable in mid-2009? When answering this question consider the new capital injections by shareholders in case the financial institutions do not withdraw their financing.
- Assess the possible sale as discussed by the Autopistas del Centro Board of Directors on May 15, 2009, and consider how you would negotiate a possible price at which to sell the project to a new operator. When answering this question, consider the price required by current shareholders. Also, consider the price the new operator would be willing to pay under the possibilities for creating value in the company as outlined by Martínez.
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Case answers for Project Finance for Autopistas del Centro
I. Introduction – Autopistas del Centro (AC)
Autopistas del Centro (AC) is a private Spanish firm, which 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 to 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 traffics within the northern area of Madrid, especially on peak days like at 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 in 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 in 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 it impacts on 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 to find 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…