Case 019Liability management and refinancingCore
Aurvika Telecom faces Rs 800 crore, Rs 1,500 crore and Rs 400 crore of maturities over the next three years, with Rs 300 crore of cash and Rs 250 crore of free cash flow a year. Lay out the refinancing plan and say which maturity to address first.
1The situation
Aurvika Telecom, a regional broadband and mobile operator, has Rs 2,700 crore of bonds and loans maturing over the next three years: Rs 800 crore in year 1, Rs 1,500 crore in year 2 and Rs 400 crore in year 3. It holds Rs 300 crore of cash and generates about Rs 250 crore of free cash flow a year after capex and interest.
EBITDA is Rs 1,100 crore, so net debt is about 2.2x EBITDA. The bond market is open today and Aurvika could issue five-year bonds. It also has an undrawn Rs 300 crore revolving credit facility.
2Your task
Show where cash falls short, which maturity to deal with first and how, and lay out the plan for all three years.
Quick check
Which maturity should Aurvika deal with first?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Address the year 2 maturity first: issue about Rs 1,300 crore of five-year bonds now and use the money to buy back most of the year 2 debt. Cash falls short by Rs 250 crore in year 1, Rs 1,250 crore in year 2 and Rs 150 crore in year 3, Rs 1,650 crore in all. Year 1's gap fits in the revolver and year 3's is small; year 2's can only be met by the market and should be met early.
Step 1Where does cash fall short?
Lay the maturities against the cash that can meet them, year by year. Year 1: Rs 300 crore of cash plus Rs 250 crore of free cash flow is Rs 550 crore against Rs 800 crore due, short Rs 250 crore. Year 2: with the cash used up, Rs 250 crore of free cash flow meets a Rs 1,500 crore maturity, short Rs 1,250 crore; year 3 is short only Rs 150 crore. The shape is a tower in the middle, often called a maturity wallA large amount of debt falling due in a short period, which the borrower must refinance or repay at once. in the market.
Step 2Why deal with year 2 before year 1?
Because year 1 has a plan and year 2 does not. A family with a small bill next month and a large one next year books the loan for the large one while the bank is still being friendly. Year 1's Rs 250 crore gap fits inside the Rs 300 crore revolver; year 2's Rs 1,250 crore gap can only be met by new debt, and refinancing is cheapest while the maturity is far away and the market is open. Once a maturity is within a year, auditors, rating agencies and investors start asking whether it will be met, and the price of the answer rises.
Step 3What does the full plan look like?
Now: issue about Rs 1,300 crore of five-year bonds and launch a tender offer for the year 2 debt, buying back as much as holders will sell at a small premium. Year 1: repay Rs 800 crore from Rs 550 crore of cash and free cash flow plus Rs 250 crore from the revolver. Year 2: repay any untendered year 2 debt from the bond proceeds held back, and use free cash flow to clear the revolver. Year 3: repay Rs 400 crore from free cash flow, topping up with the revolver if needed. Leverage of about 2.2x EBITDA makes the new issue credible.
| Rs crore | Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| Maturity | 800 | 1,500 | 400 |
| Internal cash available | 550 | 250 | 250 |
| Shortfall | 250 | 1,250 | 150 |
| Funded by | revolver | new bond, now | free cash flow and revolver |
Step 4What does refinancing early cost?
It is not free, and the interviewer will ask. Issuing now means paying interest on the new bonds while the old ones are still outstanding, unless holders tender, and a tender usually needs a premium over the market price. Both are small next to the cost of arriving at a Rs 1,500 crore maturity in a closed market. Close with the rule: refinance the maturity that cash cannot cover, and do it early.
Where candidates lose it
The usual miss is dealing with maturities in date order. Year 1 is closest but already covered by cash and the revolver; the danger sits in year 2.
The second is refinancing everything at once for neatness. Year 3's gap is small enough for free cash flow and the revolver, and funding it now adds cost for no gain.
What the interviewer asks next
- The bond market closes for six months starting next week. What is your plan now?
- Only 60% of year 2 holders tender. What happens to the rest?
- Would you rather extend the year 2 debt with an exchange offer than issue new bonds?
Company names and figures are illustrative.