Poland's A2 Motorway Case Solution

The features of this project finance

The project is named A2 motorway. It is a staged projected, which means it will be completed in steps. It will be an open toll road in which tool baths will be located at various locations throughout the motorway. AWSA is authorized to design, finance, build and operate the western third of the A2 Motorway, a distance of 254 km. Phase 1 is expected to finish is 6.25 years after financial close. The government has leased the motorway to AWSA for 40 years for initial fees 10 million Euros and annual fees 5.5 million PLN.

The government has the right to terminate the concession for "cause" or for defined forms of nonperformance such as failure to commence or complete work by certain deadlines, or failure to make required Payments to the Government. If the Government does not terminate for cause, it will assume ownership and operation of the concession. All the financing would remain in place and toll revenues would remain dedicated to debt service. The Government also has the right to terminate in the public interest, without cause. In this case, it is obligated to compensate AWSA for the cost of fully retiring AWSA's debt obligations and for the net present value of the cash flow distributions that would have been made to shareholders had the concession not been cancelled.²

The original financial structure proposed by Wojciech Gebicki (Vice President-Finance and Chief Financial officer of Autostrada Wielkopolska, SA-

i. How was done the senior debt? (Obligations, commitments, provisions, risks regarding this debt)

The total cost of the project is 934 million euros, out of which 220 million is expected to be financed with bank loans; zero-coupon bonds of 266 million euros with three tranches; 235 million from equity and subordinated and the rest from equity and deeply subordinated debt.  

Credit Lyonnais and Commerzbank are the joint lead arrangers for the bank financing. They are responsible for arranging 220 million euro of senior debt. The senior debt would have a drawdown period of 5.5 years, followed by a six month grace period and semiannual principal and interest payments thereafter. The loan was priced at 6 month LIBOR plus 180 to 235 bps. Senior debt has a maturity of 13 to 15 years, and its payment depends on the operating cash flows. Minimum principal payment required 1.15 times debt coverage ratio. AWSA is also required to have cash reserves in lender-controlled account for capital expenditure, heavy maintenance, and debt service. AWSA has to accumulate 43 million euros from operating cash flow for paying the first major surfacing. It also has to build up a debt service equal to six months’ accrued interest and next schedule principal payment for the senior debt. The main risk for this debt is the inability to generate sufficient revenue to pay the interest and principal. Banks have counter party risk. In this situation, banks can have both default risk as well as credit risk. Default risk is a situation when counter party is not able to honor the commitment. Where is credit risk is when counter party is not able to fulfill the commitment at the due date but, they might be able fulfill, at some future date. Default risk causes bankruptcy, whereas credit risk results in debt rescheduling. Also, duration of the project is very long so banks also run the interest rate risk.

The feasibility of the forecast of toll revenues 

According to AWSA’s vice president finance and chief operating officer revenue projections are very conservative. However since banks are considering some negotiation after conducting their study, which shows that still revenue projections are very ambitious. AWSA projects that it will be able to capture 50% of the capacity. Since this is first such kind of initiative in Poland so, there is not a direct comparison. Some other data shows tolled motorway usually captures 10 to 20% of the capacity. This clearly shows figure is very optimistic. Even Standard and Poor analyst has concern over this projection.  Also, M 1, one small scale motor way generated 35% less revenue than the projected figures. It is less likely that exact for casted amount of revenue will be generated.