Financing a Sea Link

...

- PV of Reduction in Agency cost of Equity

Due to high D/E, agency costs, i.e. costs due to non-alignment of interests between creditors and management, become high. Hence for the Versova-Bandra Sea-Link project, present value of agency costs are expected to be substantial. As a ballpark estimate, we take it as 5% of the NPV of unlevered project.

Market value = Value of Unlevered firm + PV of Interest Tax Shields – PV of cost of Financial distress + PV of Reduction in Agency cost

- MV (levered) of project (in Cr.) = NPV + (.35 x 5783) - (0.5% x NPV ) + (5% x NPV)

= 1,21,79,87,938/-

Capital Structure of Project

Based on various estimates available, the total cost of the project works out to Rs.7500 Crore. The project will be based on the public private partnership model instead of the often taken engineering procurement and construction (EPC) model. The project is proposed to be funded by a consortium of infrastructure companies, pension funds from Canada,insurance, bonds, term loans from banks and debt take from infrastructure financing institutions. A snapshot of the sources of funds for the project is presented below.

Source of Funds

Amount (in Rs. Crore)

% of Total Funds

Share Holders’ Funds

Canadian Pension Fund

375

5

Consortium

1342.03

17.89

Market Borrowings:

- Bonds - Regular

769.23

10.26

- Term Loans from Financial Institutions

2609.89

34.78

- Term Loans from Banks

2403.85

32.05

7500

100

Rationale for debt structure

The consortium of companies mentioned earlier include L&T Infra, RInfra, HCC and Mumbai Metropolitan Region Development Authority (MMRDA). In this case, MMRDA provides the public funds in the form of equity. MMRDA is the nodal agency for all projects in the Mumbai Metropolitan Region. The project has also been able to bring in investment in the form of equity from pension funds from Canada.

As is the case with most infrastructure projects, debt holders will be taking up a major portion of the project costs. Debt has been divided into three major parts. Bonds issued by the entity that will be constructing the sealink. These bonds would have to be issued at higher rates due to the risky nature of the project. The market rates for infrastructure bonds will be in the range of 8.5-9%. One major advantage of the bond market is its long maturities, typically in the range of 10-30 years. These period are longer than those available from term loans of Banks. However, the bond market is yet to develop in India.

The other major source of debt financing is infrastructure financing institutions. These are companies such as IDFC, IFCI , IIFCL, SREI Finance Limited and IL&FS which were established with the sole purpose of financing infrastructure projects. These companies issue debts at relatively longer terms and lower rates. The rates for such loans generally in the range of 10-11%.

The final source of debt financing is term loans from banks. These are debts with the shortest term, typically in the range of 3-5 years. The rates for such loans are in the range of 12-13%. Taking the average rates for each form of debt financing, weighted average cost of debt works out to around 11.1%.

REVENUE

After completion of Bandra Varsova sealink, the cost is expected to be recovered by the collection of tolls. For the estimation of the same, expected traffic on the sealink has been computed.

Currently, passengers from Bandra to Varsova commute by multiple options of suburban railway and a road route which takes more than one hour to traverse the 11km stretch. It is expected that 20% of passengers from suburban rail would shift to the sealink. Out of the newly added passengers, 80 % would commute by buses and 20% would commute by cars. Assuming the number of passengers in a bus is 60 we get the number of passengers shifting from suburban rail to the new road proposed. It is expected that 100 trips would be done by car in a year and 365 trips would be done by a bus.

Bus trips

1537066

1572931

1609633

1647191

1685625

Car trips

6316710

6464100

6614929

6769278

6927227

Also, there is a set of passengers who commute by the current road system. Assuming a 3% CAGR in number of cars of buses and 0.1% increase in commercial vehicles the total number of passengers is found. An estimated 40% percent of this traffic will get diverted through the new route which gives us the total traffic through the new route as

Car trips

28509729

29322910

30159503

31020189

31905666

Commercial Vehicle trips

3415257

3418672

3422091

3425513

3428938