Case 005Asset-backed, project and real-asset lendingCore

Brahvi Airports handles 12 million passengers, earning Rs 400 each in regulated charges and Rs 250 each from shops and parking, at a 45% EBITDA margin. It needs Rs 3,000 crore of capex. How much debt can it carry at 1.4x cover over 15 years at 9%, and what does a tariff reset do?

Bain CapitalBoston · 2023

The situation

Brahvi Airports runs a single city airport under a long concession. It handled 12 million passengers last year. Aeronautical charges, the landing, parking and passenger fees set by the airport regulator, bring in Rs 400 per passenger. Non-aeronautical income from retail, food, car parking and advertising brings in Rs 250 per passenger. The EBITDA margin is 45%, and almost all costs are fixed in the short run.

Brahvi needs Rs 3,000 crore for a new terminal. Maintenance capex and tax take Rs 60 crore a year. Lenders will size debt so that cash available for debt service covers level annual payments 1.4x, over 15 years at 9%. The regulator resets aeronautical charges every five years, and the next reset is due in two years.

Your task

Size the debt today, then show what a 15% cut in aeronautical charges at the reset does to that number, and say how you would lend.

Quick check

Roughly how much of the Rs 3,000 crore can debt fund at 1.4x cover?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Brahvi can carry about Rs 1,675 crore of debt today, but only about Rs 1,261 crore if the reset cuts aeronautical charges by 15%. Revenue of Rs 780 crore at 45% is Rs 351 crore of EBITDA and Rs 291 crore of cash for debt service, supporting Rs 208 crore a year of payments. I would size the senior loan on the post-reset case and leave the rest to equity or a later tranche.

Step 1Where does an airport's cash actually come from?

From two engines with different owners. A railway station food stall earns what the station's footfall and its prices allow; the platform ticket price is set by someone else. An airport's aeronautical revenueCharges for using the airport itself, such as landing, aircraft parking and passenger fees, usually set or capped by a regulator. is a regulated price times traffic, while its non-aeronautical revenue is a market business riding on the same traffic. At 12 million passengers that is Rs 480 crore regulated and Rs 300 crore from the market, Rs 780 crore in all.

An airport's cash comes from two engines with different owners12 million passengersthe shared driverAeronautical: regulatedRs 400 a passenger, set by the regulatorReset every few yearsRs 480 crNon-aeronautical: marketRs 250 a passenger: shops, parking, foodMoves with traffic and spendRs 300 crRevenue 780, EBITDA at 45%: 351Cash for debt service: 291Base: debt capacity Rs 1,675 crAfter 15% reset: Rs 1,261 cr
Brahvi's 12 million passengers drive Rs 480 crore of regulated aeronautical revenue and Rs 300 crore of market-driven non-aeronautical revenue; together they support about Rs 1,675 crore of debt, falling to about Rs 1,261 crore if the regulator cuts aeronautical charges by 15%.
Step 2How much debt does that cash support?

Size from cash, then divide by the cover. EBITDA at 45% is Rs 351.0 crore; after Rs 60 crore of maintenance capex and tax, Rs 291.0 crore is available. At 1.4x cover the yearly payment can be Rs 207.9 crore, and a 15-year level payment loan at 9% of that size is about Rs 1,675 crore. That is 56% of the Rs 3,000 crore terminal, so roughly Rs 1,300 crore has to come from equity, a concession fee deferral or grants.

The relationship
D=CFADS1.4×1−(1.09)−150.09=207.9×8.061≈1,675D = \frac{CFADS}{1.4} \times \frac{1-(1.09)^{-15}}{0.09} = 207.9 \times 8.061 \approx 1,675
CFADScash available for debt service, Rs 291 crore
1.4the cover lenders require
8.061the value today of Rs 1 a year for 15 years at 9%
What it says in wordsDebt capacity is the largest yearly payment the cash can cover, turned into a loan amount at the loan's rate and tenor.
Step 3What does a tariff reset do to that number?

In many regimes the regulator resets aeronautical charges every few years to give the airport a set return on its assets, and part of the shop and parking profit can be counted against it, so charges can fall. A 15% cut takes Rs 72 crore straight off EBITDA because costs are fixed, and debt capacity drops to about Rs 1,261 crore, Rs 415 crore less. A loan sized on today's numbers would see its cover fall to 1.05x the day the reset lands. Confirm how the current regulatory framework treats non-aeronautical income before relying on any reset assumption.

Step 4How would you lend?

Size the senior loan on the case that can happen in two years, not the case that is true today. Lend about Rs 1,261 crore of 15-year senior debt, which holds 1.4x even after a 15% cut, and fund the remaining Rs 1,739 crore with sponsor equity and, if needed, a smaller second tranche that is only drawn once the reset outcome is known. Add a debt service reserve and a cash sweep that switches on if cover drops below 1.5x. The new terminal will add capacity, but traffic growth only counts in the sizing once it has shown up in the numbers.

Where candidates lose it

The common miss is treating Rs 650 of revenue per passenger as one stream and applying one growth rate to it. The two halves carry different risks: one is a regulatory decision that can reprice overnight, the other rises and falls with passenger spending.

The second is sizing the debt against the Rs 3,000 crore capex need. Debt is sized from cash; the capex need only tells you how big the equity gap is.

What the interviewer asks next

  • Traffic falls 20% in a downturn. Which revenue stream suffers more, and what happens to cover?
  • Would you accept a 20-year tenor to lift debt capacity? What is the risk?
  • How does a single-till regime differ from a dual-till regime for a lender?

Asked at Bain Capital, Generalist, Boston, 2023 (Wall Street Oasis): some random accounting questions, and a case about an airport company

Company names and figures are illustrative.