POLAND’S A2 Motorway_final

POLAND’S A2 Motorway

Case : Poland’s A2 Motorway Background: AWSA is an 18 firm consortium with concession to build and operate toll road as part of Paris-Berlin-Warsaw-Moscow transit system. Seeking financing for the € 1bn deal (25% equity). Is being asked to put in additional € 60-90m in equity. Concession due to expire in 6 weeks

Project Timeline

Construction Risk and Mitigation Strategy Construction Risk 

Delay in Commercial operation

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Cost Overrun

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Quality of Work and Hidden Defects

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Force majeure

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Delay in getting clearance

Allocation of Risk

Between AWSA and The Development Company Mitigation Strategy 

Selecting Reputed and cash rich builder

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Fixed-Price design and Construction turnkey contract and provision for liquidated damages for each day of delay

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Performance Bond and latent Defect Bond

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Government responsible for procedural delay and support infrastructure. Insurance against Force Majeure, adequate surplus for contingencies.

World Bank Framework For Risk Mitigation During Construction Period

Operating Risk and Mitigation Strategy Operating Risk: Demand Risk: Traffic volume and revenue generationA2 Motorway is the 1 st toll road toll road in Poland. Estimating traffic volume and revenue is difficult. Chances of forecasting error is high.  Increasing in Operating and Maintenance cost. 

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Force majeure

Allocation of Risk

Between AWSA and Operating Company

Mitigation Strategy Contractual agreement between AWSA and operating company for O&M.  Multiple analyses by reputable entities for traffic volume and revenue projections.  Comprehensive insurance against Force Majeure.  Experienced operators, road layout deters misuse. 

World Bank Framework For Risk Mitigation During Operating Period

Political Risk:  Change in government A different political party takes control Effect: this could create delays due to the risk of change in heart The Government responsible for fully covering debt obligations plus NPV of cash flow Allocation of Risk Best controlled by Polish Government and AWSA. Mitigation Strategy 

Use of UK law, enforceable through Polish courts.  Counter guarantees by government against building competing systems, ending concession.

Financial Risk

a)Currency Risk  Weakening of the Zloty vs. the Euro(2.22zloty/euro in 1993 to 4zloty/euro) Mismatch between zloty revenue and euro-denominated debt gives exposure to currency risk Allocation of Risk AWSA Mitigation Strategy  The best strategy is hedge the exchange rate risk. According AWSA explanation there is no derivative available for hedging zloty/euro currency risk. So they have not gone for currency hedging  They should have gone for cross-hedging the exchange-rate risk by using the forward markets of a third country's currency.  If they are not hedging they should try to purchase materials from Poland suppliers when possible. 

b)Interest Rate Risk 

Fluctuation in spread between Polish interbank rate and LIBOR. Spread has increased for 185 bps to 235 bps  As the senior debt are based upon spread over 6month LIBOR they are exposed to interest rate risk. Allocation of Risk AWSA Mitigation Strategy  Interest rate Swap(plain vanilla interest rate swap: Fix for floating) c)Other Financial Risk

Other Financial Risk Mitigation Strategy  Best controlled by Sponsor and lenders.  Low senior debt(Around 26%), adequate reserves and debt coverage, flexible principle repayment,.  Control of waterfall by lenders gives better cash control.  Repayment of Loans on basis of worst case scenario.  Available of mezzanine debt with longest possible maturity and with govt guarantee  Provision for collateralized lender account to finance the future

Gebicki can/should do? Issues-