ABC Corporation wants to maximize PF debt on a particular transaction.However, it also doesn't want to default
Question:
ABC Corporation wants to maximize PF debt on a particular transaction.However, it also doesn't want to default on its PF loan and lose control of the underlying assets.ABC's bankers indicate that PF would be available for the project on the following terms:
8 year Tenor, No Grace period, then even principal amortization
2 Year construction period, even loan drawdown
LIBOR + 2% interest rate (LIBOR is estimated to be 2%)
Interest will be capitalized during construction
Maximum leverage ratio of 70% of project capital costs
The project's economic assumptions are as follows:
$100 M project capital costs
Project spending will take place over 2 years, $50 M spent each year. Any project loan will be drawn down evenly over the construction period
Annual EBITDA, after cash expenses including rentals (but not interest) is $20 M p.a.for years 1-3, $25 M p.a. for years 4-6, $35 M p.a. for 7-10 and $15 M p.a. for years 11-15.Rental expenses are $3 M p.a. There will be no residual value
Project tax rate is 30%
EBITDA is expected to be modestly volatile, and DSCR/LLCRs of 1.6 x would be acceptable to the Lenders
Calculate the project's DSCRs and LLCR at 70% leverage.Does the loan work at this level and with these terms?If not, describe how you would adjust the loan terms and/or size to best meet ABC's objectives.