Toll-Road Concession Bid with Bypass Risk
An infrastructure fund is bidding for a 25-year toll-road concession in a middle-income country. The asset generated EBITDA of $120m last year on traffic 8% below pre-pandemic levels; traffic has recovered for three consecutive quarters but remains volatile. The concession agreement caps toll increases at CPI minus 1%, and CPI is 4%. Operating costs are 35% of revenue and largely fixed. The fund plans 70% debt at 6.5% fixed for 10 years, with a 15-year amortization and a 1.3x DSCR covenant. The equity cheque is $300m; the fund targets a 12% net IRR and has a 10-year hold. The government has announced a competing bypass road in year 7, but no funding is committed. The seller is a construction company seeking a quick exit and has set a 6-week deadline. The fund's IC asks whether to bid and at what maximum equity value, and how to treat the bypass risk.
1. Estimate the maximum equity value the fund can pay to achieve a 12% net IRR, stating assumptions. Is a bid justified by the deadline?
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A precise value needs a full cash-flow model, but the structure can be bounded. EBITDA is $120m. At 70% debt and a $1,000m enterprise value, debt is $700m and equity is $300m, or 8.3x EBITDA. A 12% net IRR over 10 years requires roughly a 3.1x equity multiple (1.12^10 is about 3.1), so $300m of equity must return about $930m. With $700m of debt at 6.5%, annual interest is about $45.5m; 15-year amortization adds about $47m of principal. EBITDA minus interest and principal is only about $27.5m before capex and taxes. DSCR is $120m divided by $92.5m, or 1.30x, exactly at the covenant. Any traffic shortfall breaches it.
A 10% traffic shortfall could cut EBITDA to about $105m and DSCR to 1.14x. That is not financeable without an equity cure or a smaller debt layer. I would not underwrite to a $1,000m EV. A maximum bid closer to 7.0-7.5x EBITDA, with 60% debt and equity of $200-250m, is more defensible. The 6-week deadline is not a reason to bid at the top; bid only with a financing condition and a 10% traffic stress.
2. How should the bypass-road risk be reflected in the bid and in contractual protections?
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Reflect bypass risk in three places: the traffic case, the price, and the protections. In the base case, assume a modest diversion from year 7; in the downside case, assume a 15-25% traffic loss because a government announcement can affect traffic even before construction. In the bid, apply a valuation haircut or seek a price adjustment mechanism. In the protections, require the concession authority to compensate for material competing infrastructure, or include a change-in-law or compensation event. Size a debt service reserve account to at least six months of debt service and require base-case DSCR headroom of at least 1.4x, not 1.3x.
Because no funding is committed, the risk is lower but not zero. Commission an independent traffic study and a legal opinion on compensation rights; do not rely only on the seller's consultant. Check whether the concession has a termination payment that covers outstanding debt. If the government will not provide compensation or the legal opinion is weak, either bid with a 10-15% haircut and a condition precedent, or decline. A fast deadline is a reason to price uncertainty, not to ignore it.
3. What conditions would you require before waiving the 6-week deadline and submitting a binding bid?
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Waiving the deadline requires converting unknowns into priced and enforceable terms. Require an independent traffic and revenue study, a legal review of the concession and compensation rights, confirmation from the government on the bypass road's status and funding, and a financing commitment from lenders with a DSCR stress at 10% below base-case traffic. Obtain insurance for political and force-majeure risk, and confirm the termination payment covers debt. Require a debt service reserve account and a covenant package with equity cure rights.
The bid should be conditional on these items, not binding without them. If the seller refuses a condition or a price adjustment, walk away. The IC should also check that the fund's infrastructure allocation and concentration limits permit a single-asset toll road with demand risk. A 6-week deadline can be acceptable for a small add-on asset, but not for a $1bn-plus concession with unresolved bypass risk.