Boot Module - Heathrow Model Slides

Classification: Internal
BOOT: PROJECT FINANCE

SIMPLIFIED - HEATHROW
LEARNING OBJECTIVES
1 Learn business case of a regulated airport
2 Understand the main PF components in a deal
3 Understand the complexities
4 Learn the process for optimizing a deal

HEATHROW - OVERVIEW
Project Inception
• In early 2010, the Department for Transport predicted a significant increase in
air passengers in England, and London specifically.
• In 2012 British Airports Authority (BAA), a privately held company, announced
record traffic figures for passengers, accelerating the need for expansion
• An independent body, the IAC (Independent Airports Commission) was
established by the Government to look at a possible expansion at currently
existing airports: Heathrow, Stanstead and Gatwick.
• In 2015, IAC unanimously recommended an additional runway at Heathrow
• In 2020, runway at Heathrow ruled illegal over climate change
HEATHROW - OVERVIEW
BUSINESS CASE OF AN AIRPORT

Take-off
Aero rev
Landing
Retail
Non-aero rev Carpark

Advertising
Other
BUSINESS CASE OF AN AIRPORT

Revenue comes from Aero + Non-Aero revenue
Take-off
Regulated Aero rev

Landing
Retail
Non-
Non-aero rev Carpark
regulated
Advertising
Other
FINANCING COSTS
Aero charges are regulated via a max WACC
Weighted average
cost of capital
60% Debt
5% p.a.
40% Equity 11% p.a.
WACC = 60% * 5% p.a. + 40% * 11% p.a.

3% p.a. + 4.4% p.a.
7.4% p.a.
FINANCING COSTS
Aero charges are regulated via a max WACC
The Civil Aviation Authority (CAA) are a public body responsible in part for value
for money for the consumer. They set the WACC for the project (e.g. = 6% p.a.)
for a 5 year regulatory period
Aero rev Opex
Capex
Non-aero rev
Financing
FINANCING COSTS
Calculate Aero charges after calculating Financing costs
Financing costs = WACC * RAB
Aero rev Opex
Capex
Non-aero rev
Financing
FINANCING COSTS
Financing the Investment
A return of the investment amount * WACC compensates for the cost of
financing the investment
RAB: Regulated
Asset Base
Investm
ent = RAB =
£10bn £Xbn ?
FINANCING COSTS
Investm
ent
£10bn
RAB * RAB * RAB * RAB* RAB*
WACC WACC WACC WACC … WACC
Investm
ent =
£10bn
FINANCING COSTS
RAB * RAB * RAB * RAB* RAB* RAB* RAB*

WACC WACC WACC WACC … WACC WACC WACC …
Investm
ent =
£10bn
REVENUE PER PAX

Aero revenue can now be calculated on a per passenger basis
E.g. If Opex + Capex + Financing = £1.75bn, non-aero revenue = £1bn
£1.75bn
Aero rev Opex
£1bn Capex
Non-aero rev
Financing
REVENUE PER PAX

Aero revenue can now be calculated on a per passenger basis
E.g. If Opex + Capex + Financing = £1.75bn, non-aero revenue = £1bn
Then aero revenue needs to be £0.75bn
Cost per PAX = £0.75bn / 30m passengers = £25
£0.75bn £1.75bn
Aero rev Opex
£1bn Capex
Non-aero rev
Financing
TIMELINE
8 years 7 years 25+ years
Project Development Construction Operations

TIMELINE
8 years 3 years 25/30 years

TIMELINE
8 years

PROCESS
Project Development
Construction Operations Negotiations
Construction
1 Uses of capital (e.g. £10bn construction + IDC + financing fees)
2 Sources of capital (e.g. debt + equity)

OVERVIEW OF PROCESS
Project Development
Operations – calculations
3 Revenue: aero (price x volume) & non-aero (not broken down)
4 Opex & Capex: Simple assumptions – no major lifecycle capex
5 Debt – Principal: Fixed repayment style vs annuity
6 Debt – Interest: All-in rate vs base rate + margin
7 Tax: Simple tax calculation vs tax depreciation & tax losses

OVERVIEW OF PROCESS
Project Development
Operations – cashflows & metrics
8 CFADS & CFAE – simple structure
9 DSCR – Debt Service Coverage Ratio – CFADS / [Interest + Principal]
10 LLCR – Loan Life Coverage Ratio – discount CFADS to today : Debt balance
11 Equity IRR – returns to equity holders
12 Project IRR – returns to debt & equity

PROCESS
Project Development
13 Negotiations & optimizations
i Debt – max gearing & min DSCR
ii Equity – min IRR
iii CAA – acceptable to consumers

PROCESS
Project Development
13 Negotiations & optimizations – using a scenario manager
i Debt – annuity style of repayment
ii Longer concession – an extra 5 years of revenues
iii Longer debt tenor – an extra 5 years to repay debt
iv Increased gearing – debt finance 80% of capex rather than 70%
v All changes – all simultaneously

FEASIBILITY
Project Development
Work done to-date
A Heathrow conducted feasibility study and submitted a master plan for the
construction of 3rd runway to the government.
B SPV estimated £10 bn for third runway expansion design & construction.
Financed with
£7bn debt, syndicated through a consortium of lenders
£3bn equity, provided by current owners (e.g. Ferrovial)
CONSTRUCTION (3 YRS)
Project Development
Construction
1 Uses: SPV estimates £10 bn for third runway expansion design & construction,
over 3 years of construction for
Design fees, Raw materials, Labor, Project management
Project Development
Construction
2 Sources: Debt & equity is drawn pro-rata; financed by 70% debt, 30% equity
Uses Yr 1 Yr 2 Yr 3
Profile % 20.00% 50.00% 30.00%
Capex GBP M 10,000 2,000 5,000 3,000
Sources
Equity GBP M 3,000 600 1,500 900
Debt GBP M 7,000 1,400 3,500 2,100
Project Development
Construction
2 Sources: Debt & equity is drawn pro-rata; financed by 70% debt, 30% equity
Uses Yr 1 Yr 2 Yr 3
Profile % 20.00% 50.00% 30.00%
Capex GBP M 10,000 2,000 5,000 3,000
Sources
Equity GBP M 3,000 600 1,500 900
Debt GBP M 7,000 1,400 3,500 2,100
OPERATIONS - REVENUE
Project Development
3 Heathrow is a regulated privately held asset. It will collect

• Aero: landing revenues at a regulated price (£25 per person, 30m passengers
arriving per annum)
• Non-aero: revenues from retail, car park, baggage, advertising (£1 bn p.a.)
Aero Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Passengers per annum Num M
GBP / PAX GBP / PAX
Regulatory charge GBP M - - - - - - -
Non-aero
Non aero revenue GBP M
OPERATIONS - REVENUE
Project Development
3 Heathrow is a regulated privately held asset. It will collect

• Aero: landing revenues at a regulated price (£25 per person, 30m passengers
arriving per annum)
• Non-aero: revenues from retail, car park, baggage, advertising (£1 bn p.a.)
Aero Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Passengers per annum Num M 30 30 30 30 30 30 30
GBP / PAX GBP / PAX 25 25 25 25 25 25 25
Regulatory charge GBP M 750 750 750 750 750 750 750
Non-aero
Non aero revenue GBP M 1,000 1,000 1,000 1,000 1,000 1,000 1,000
OPEX & CAPEX

Project Development
4 Opex & Capex

• Opex = £0.50bn p.a.
• Labor
• Electricity
• Capex = £0.35bn p.a.
• Runway maintenance
• Baggage systems maintenance
Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Operating cost GBP M 500 500 500 500 500 500 500
Maintenance capex GBP M 350 350 350 350 350 350 350
DEBT - PRINCIPAL
Project Development
5 Debt is paid down at regular intervals

• Tenor = 20 years
• Fixed annual repayments
Counters End Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Debt tenor [1,0] Yr 23 1 1 1 1 1 1 1
Repayment periods remaining Num# 20 19 18 17 16 15 14
Account Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Balance b/f GBP M 7,000 7,000 7,000 7,000 7,000 7,000 7,000
Drawdown GBP M - - - - - - -
Repayment GBP M
Balance c/f GBP M 7,000 7,000 7,000 7,000 7,000 7,000 7,000
DEBT - PRINCIPAL
Project Development
5 Debt is paid down at regular intervals

• Tenor = 20 years
• Fixed annual repayments → £7bn / 20 years = £0.35bn principal p.a.
Counters End Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Debt tenor [1,0] Yr 23 1 1 1 1 1 1 1
Repayment periods remaining Num# 20 19 18 17 16 15 14
Balance b/f GBP M 7,000 6,650 6,300 5,950 5,600 5,250 4,900
Repayment GBP M (350) (350) (350) (350) (350) (350) (350)
Balance c/f GBP M 6,650 6,300 5,950 5,600 5,250 4,900 4,550
DEBT - INTEREST
Project Development
6 Interest is paid annually

• Fixed interest rate of 5% p.a.
Balance b/f GBP M 7,000 6,650 6,300 5,950 5,600 5,250 4,900
Repayment GBP M (350) (350) (350) (350) (350) (350) (350)
Balance c/f GBP M 6,650 6,300 5,950 5,600 5,250 4,900 4,550
Debt service
Interest GBP M 350 333 315 298 280 263 245
Principal GBP M 350 350 350 350 350 350 350
Total debt service GBP M 700 683 665 648 630 613 595
TAX PAYMENTS
Project Development
7 Tax is paid annually

• Tax rate = 17% of taxable income
• Depreciation is assumed to be equal to capex (£0.35bn p.a.)
• Assumed to be no tax losses
EBITDA GBP M 1,250 1,250 1,250 1,250 1,250 1,250 1,250
Less interest GBP M (350) (333) (315) (298) (280) (263) (245)
Less depreciation GBP M (350) (350) (350) (350) (350) (350) (350)
Taxable income GBP M 550 568 585 603 620 638 655
Tax payable GBP M

Tax paid GBP M - - - - - - -
TAX PAYMENTS
Project Development
7 Tax is paid annually

• Tax rate = 17% of taxable income
• Depreciation is assumed to be equal to capex (£0.35bn p.a.)
• Assumed to be no tax losses
EBITDA GBP M 1,250 1,250 1,250 1,250 1,250 1,250 1,250
Less interest GBP M (350) (333) (315) (298) (280) (263) (245)
Less depreciation GBP M (350) (350) (350) (350) (350) (350) (350)
Taxable income GBP M 550 568 585 603 620 638 655
Tax payable GBP M 94 96 99 102 105 108 111

Tax paid GBP M 94 96 99 102 105 108 111
CFADS
Project Development
8 Cashflow Available for Debt Service (CFADS)

• Revenue less expenses (less working capital, not shown here)
• Less capex
• Less tax
Revenue GBP M
Expenses GBP M
Operating cashflow GBP M
Capex GBP M
Tax GBP M
CFADS GBP M
CFADS
Project Development
8 Cashflow Available for Debt Service (CFADS)

• Revenue less expenses (less working capital, not shown here)
• Less capex
• Less tax
Revenue GBP M 1,750 1,750 1,750 1,750 1,750 1,750 1,750
Expenses GBP M (500) (500) (500) (500) (500) (500) (500)
Operating cashflow GBP M 1,250 1,250 1,250 1,250 1,250 1,250 1,250
Capex GBP M (350) (350) (350) (350) (350) (350) (350)

Tax GBP M (94) (96) (99) (102) (105) (108) (111)
CFADS GBP M 807 804 801 798 795 792 789
DEBT COVENANTS - DSCR

Project Development
9 Debt Service Coverage Ratio (DSCR)

• DSCR = CFADS / (Interest + Principal)
• In period or annual ratio
Debt service Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10
Interest GBP M 350 333 315 298 280 263 245
Principal GBP M 350 350 350 350 350 350 350
CFADS GBP M 807 804 801 798 795 792 789
DSCR x

Project Development

Interest GBP M 350 333 315 298 280 263 245
Principal GBP M 350 350 350 350 350 350 350
CFADS GBP M 807 804 801 798 795 792 789
DSCR x

Project Development

Interest GBP M 350 333 315 298 280 263 245
Principal GBP M 350 350 350 350 350 350 350
CFADS GBP M 807 804 801 798 795 792 789
DSCR x

Project Development

Interest GBP M 350 333 315 298 280 263 245
Principal GBP M 350 350 350 350 350 350 350
CFADS GBP M 807 804 801 798 795 792 789
DSCR x 1.15x 1.18x 1.20x 1.23x 1.26x 1.29x 1.33x

DEBT COVENANTS - LLCR

Project Development
10 Loan life coverage ratio (LLCR)

• LLCR = NPV of CFADS / Debt Balance
• Beginning of period ratio
Interest GBP M 350 333 315 298 280 263 245
Principal GBP M 350 350 350 350 350 350 350
CFADS GBP M 807 804 801 798 795 792 789

NPV of CFADS GBP M 9,721 9,403 9,073 8,729 8,371 7,998 7,609

Project Development

Balance b/f GBP M 7,000 6,650 6,300 5,950 5,600 5,250 4,900
Repayment GBP M (350) (350) (350) (350) (350) (350) (350)
Balance c/f GBP M 6,650 6,300 5,950 5,600 5,250 4,900 4,550
NPV of CFADS GBP M 9,758 9,439 9,108 8,762 8,403 8,029 7,638
LLCR (beginning pd) x 1.47x 1.50x 1.53x 1.56x 1.60x 1.64x 1.68x

Project Development

Balance b/f GBP M 7,000 6,650 6,300 5,950 5,600 5,250 4,900
Repayment GBP M (350) (350) (350) (350) (350) (350) (350)
Balance c/f GBP M 6,650 6,300 5,950 5,600 5,250 4,900 4,550
NPV of CFADS GBP M 9,758 9,439 9,108 8,762 8,403 8,029 7,638

Project Development

Balance b/f GBP M 7,000 6,650 6,300 5,950 5,600 5,250 4,900
Repayment GBP M (350) (350) (350) (350) (350) (350) (350)
Balance c/f GBP M 6,650 6,300 5,950 5,600 5,250 4,900 4,550
NPV of CFADS GBP M 9,758 9,439 9,108 8,762 8,403 8,029 7,638

Project Development

Balance b/f GBP M 7,000 6,650 6,300 5,950 5,600 5,250 4,900
Repayment GBP M (350) (350) (350) (350) (350) (350) (350)
Balance c/f GBP M 6,650 6,300 5,950 5,600 5,250 4,900 4,550
NPV of CFADS GBP M 9,758 9,439 9,108 8,762 8,403 8,029 7,638
EQUITY IRR
Project Development
11 Evaluate the Equity IRR

• Cash flow after paying the debt service is distributed to equity
• IRR is calculated using the net equity cashflow i.e. Distributions less
investment
Equity IRR Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7
Investment GBP M (3,000) (600) (1,500) (900) - - - -
Distributions GBP M 8,625 - - - 107 121 136 150
Total GBP M (600) (1,500) (900) 107 121 136 150
XIRR % p.a.
EQUITY IRR
Project Development
11 Evaluate the Equity IRR

• Cash flow after paying the debt service is distributed to equity
• IRR is calculated using the net equity cashflow i.e. Distributions less
investment
Equity IRR Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7
Investment GBP M (3,000) (600) (1,500) (900) - - - -
Distributions GBP M 8,625 - - - 107 121 136 150
Total GBP M (600) (1,500) (900) 107 121 136 150
XIRR % p.a. 6.66%
Inbuilt IRR function

in Excel
EQUITY IRR
Project Development
11 Equity IRR – setting the discount rate so investments balance the distributions
3,000
2,000
1,000
-
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14 Yr 15 Yr 16 Yr 17 Yr 18 Yr 19 Yr 20 Yr 21 Yr 22 Yr 23
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)
Investment Distributions Debt service Capex Tax Operation cost

EQUITY IRR
Project Development
11 Equity IRR – setting the discount rate so investments balance the distributions
3,000
2,000
1,000
-
(1,000)
(2,000)
(3,000)
(4,000)
(5,000) As the discount rate

(6,000) increases, cashflows
Investment Distributions Debt service Capex Tax Operation cost further away decrease
EQUITY IRR
Project Development
11 Putting distributions in context: Adding back debt service gives us CFADS
3,000
2,000
1,000
-
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)

EQUITY IRR
Project Development
11 Putting distributions in context: Adding back all cashflows gets up to revenue to

all stakeholders
3,000
2,000
1,000
-
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)

PROJECT IRR
Project Development
12 Project IRR
• The project IRR assumes that no debt is used for the project
• I.e. the investment amount equals the construction capex (+ development
costs)
• The outflows (net project cashflow) is the cash generated by the project.
• The IRR is the % which sets the NPV = 0; i.e. discounted outflows = the
discounted investment of these cash flows.
NEGOTIATIONS & OPTIMIZATIONS

Project Development
13 Here’s where the negotiations begin – the interests of each party
Debt
• Max debt = GBP [8] bn
• Max gearing = 80%
• Min DSCR = 1.20x [project has demand risk]

Project Development
Debt
Equity
• Min IRR – 11% p.a.
• Min equity to invest: GBP 2bn

Project Development
Debt
Equity
• Min IRR – 11% p.a.
• Min equity to invest: GBP 2bn
Regulator
• CAA wants to keep the aero charge as low as
possible for public welfare
13 Here’s where the negotiations begin
Senior debt
Metric Unit Current Optimised Target Assessment
Amount Invested GBP M 7,000 8,000 8,000
7,000 OK • Max debt = GBP [8] bn
Gearing % 70.00% 80.00% 80.00% OK • Max gearing = 80%
Min DSCR x 1.15x 1.33x 1.20x OK
Error • Min DSCR = 1.20x [project has demand risk]
Equity
Metric Unit Current Optimised Target? Assessment
IRR x 6.66% 11.05% 11.00% OK
Error • Min IRR – 11% p.a.
NPV @ Target IRR GBP M (1,016) 8 - OK
Error • Min equity to invest: GBP 2bn
Amount Invested GBP M 3,000 2,000 4,000 OK
CAA
Metric Unit Current Optimised • CAA wants to keep the aero charge as low as
Aero Charge USD / PAX 25.00 25.20 possible for public welfare
Senior debt
Amount Invested GBP M 7,000 8,000 8,000 OK • Max debt = GBP [8] bn
Min DSCR x 1.15x 1.33x 1.20x OK • Min DSCR = 1.20x [project has demand risk]
Equity
IRR x 6.66% 11.05% 11.00% OK • Min IRR – 11% p.a.
NPV @ Target IRR GBP M (1,016) 8 - OK • Min equity to invest: GBP 2bn
CAA
13 What levers do we have?

• Debt repayment type: Fixed → Annuity
• Longer concession (30 years)
• Longer debt tenor (25 years)
• Increased gearing (80%)
• The aero revenue (landing fee)
13 Scenarios
1. Base
2. Debt repayment type: Fixed → Annuity
3. Longer concession (30 years)
4. Longer concession (30 years) & debt tenor (25 years)
5. Longer concession, debt tenor & increased gearing (80%)
6. Longer concession & debt tenor, increased gearing & annuity
7. All of these + the take-off and landing fee
EXERCISE
SET THESE UP IN THE SCENARIO MANAGER
13 How does the model help us get there?
Scenario manager
Case number Case 1
Live Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7

Name Name Base Base Annuity Longer concession
Longer concession
Longer
+ debt
& Increased
tenor
All gearingAll + aero up
Concession tenor Year(s) 25 Yr(s) 25 Yr(s) 30 Yr(s) 30 Yr(s) 30 Yr(s) 30 Yr(s) 30 Yr(s)
Debt tenor Year(s) 20 Yr(s) 20 Yr(s) 25 Yr(s) 25 Yr(s) 25 Yr(s) 25 Yr(s)
Gearing ratio % 70.00% 70.00% 80.00% 80.00% 80.00%
Repayment type Selection Fixed Fixed Annuity Annuity Annuity
Aero charge GBP / PAX 25.00 25.00 25.20
Scenario manager
Case number Case 1

Longer concession
Longer
+ debt
& Increased
tenor
Gearing ratio % 70.00% 70.00% 80.00% 80.00% 80.00%
Scenario manager
Case number Case 1

Longer concession
Longer
+ debt
& Increased
tenor
Gearing ratio % 70.00% 70.00% 80.00% 80.00% 80.00%

13 What levers do we have?
• Debt repayment type: Fixed → Annuity
800
8,000
FIXED 7,000
700
600
6,000
5,000 500
4,000 400
3,000 300
2,000 200
1,000 100
- -
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Principal Interest
600
8,000
ANNUITY 7,000 500
6,000
400
5,000
4,000 300
3,000 200
2,000
1,000 100
- -
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Principal Interest
NEGOTIATIONS & OPTIMIZATIONS Data validation

Data validation
Name Gearing Min DSCR Equity IRR
Base Name Gearing
70.00% Min DSCR 1.15x Equity IRR
6.66%
Scenario manager Base
1 Base 70.00% 1.15x 6.66%
1
2 Base
Annuity 70.00% 1.15x
1.34x 6.66%
7.02%
Case number Case 1
2
3 Annuity
Longer concession 70.00% 1.34x
1.15x 7.02%
7.80%
Live Case 1 Case 2 Case3
4 3Longer concession
Case 4 + Case 70.00%
debt 5tenor Case 6 1.15x
1.28x
Case 7 7.80%
8.28%
Name Name Base Base Annuity Longer4 Longer concession
5concession
& Increased
Longer +gearing
debt
concession
Longer &tenor
+ debt 70.00%
80.00%
Increased
tenor
All 1.28x
gearingAll + aero up 8.28%
1.13x 9.42%
Concession tenor Year(s) 25 Yr(s) 25 Yr(s) 305 Longer
6 Yr(s)
All & 30
Increased
Yr(s) gearing 80.00%30 Yr(s) 1.13x
30 Yr(s) 9.42%
1.32x30 Yr(s)10.84%
Debt tenor Year(s) 20 Yr(s) 20 Yr(s) 6
7 All + aero 25
upYr(s) 80.00%25 Yr(s) 1.32x
25 Yr(s) 1.33x25 Yr(s)10.84%
11.05%
Gearing ratio % 70.00% 70.00% 7 All + aero up 80.00%80.00%80.00% 1.33x 80.00% 11.05%
3,000
2,000
1,000
-
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12 Yr 13 Yr 14 Yr 15 Yr 16 Yr 17 Yr 18 Yr 19 Yr 20 Yr 21 Yr 22 Yr 23 Yr 24 Yr 25 Yr 26 Yr 27 Yr 28 Yr 29 Yr 30 Yr 31 Yr 32 Yr 33
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)


Data validation
Base Name Gearing
6.66%
Scenario manager Base
1 Base 70.00% 1.15x 6.66%
1
2 Base
Annuity 70.00% 1.15x
1.34x 6.66%
7.02%
Case number Case 1
2
3 Annuity
Longer concession 70.00% 1.34x
1.15x 7.02%
7.80%
4 3Longer concession
Case 4 + Case 70.00%
1.28x
Case 7 7.80%
8.28%
Name Name Base Base Annuity Longer4 Longer concession
5concession
& Increased
Longer +gearing
debt
concession
Longer &tenor
+ debt 70.00%
80.00%
Increased
tenor
All 1.28x
gearingAll + aero up 8.28%
1.13x 9.42%
6 Yr(s)
All & 30
Increased
30 Yr(s) 9.42%
1.32x30 Yr(s)10.84%
7 All + aero 25
upYr(s) 80.00%25 Yr(s) 1.32x
25 Yr(s) 1.33x25 Yr(s)10.84%
11.05%
3,000
2,000
1,000
-
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)

Classification: Internal Data validation
DataName
validation Gearing Min DSCR Equity IRR
Base Name Gearing
6.66%
Base Name
1 Base Gearing
6.66%
Scenario manager 2 Base
1 Annuity
Base 70.00% 1.15x
1.34x 6.66%
7.02%
1
3 Base
2 Longer
Annuityconcession 70.00% 1.34x
1.15x 6.66%
7.02%
7.80%
Case number Case 1
2
4 Annuityconcession + debt tenor
3 Longer 70.00% 1.34x
1.15x
1.28x 7.02%
7.80%
8.28%
4 3Longer &
5 concession
Increased
Case 4 +gearing
Case 70.00%
debt 5tenor
80.00%Case 6 1.15x
1.28x
1.13x
Case 7 7.80%
8.28%
9.42%
Name Name Base Base Annuity Longer45 Longer
6concessionconcession
& Increased
All Longer +gearing
debt
concession
Longer &tenor
+ debt 70.00%
80.00%
Increased
tenor
All 1.28x
1.13x
1.32x
gearingAll 8.28%
9.42%
+ aero up10.84%
Concession tenor Year(s) 25 Yr(s) 25 Yr(s) 5
307 Longer
6 Yr(s)
All & 30
+ aero Increased
upYr(s) gearing 1.13x
80.00%30 Yr(s) 1.33x
30 Yr(s) 9.42%
1.32x30 Yr(s)11.05%
10.84%
7 All + aero 25
upYr(s) 80.00%25 Yr(s) 1.32x
25 Yr(s) 1.33x25 Yr(s)10.84%
11.05%
3,000
2,000
1,000
-
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)

NEGOTIATIONS & OPTIMIZATIONS DataName

Data
1 Base Name
validation Gearing
Base validation 70.00%
Min DSCR Equity IRR
70.00% Min DSCR

Gearing
1.15x
1.15x Equity
6.66%
6.66%
IRR
Base Name
2 Annuity Gearing
70.00% Min DSCR 1.15x Equity
1.34x IRR
7.02%
6.66%
Scenario manager 3 Base concession
1 Longer
Base 70.00% 1.15x 6.66%
7.80%
1
4 Base
2 Longer
Annuityconcession + debt tenor 70.00% 1.15x
1.28x
1.34x 6.66%
8.28%
7.02%
Case number Case 1
2
5 Annuity&
3 Longer 70.00%
Increased gearing 80.00%
concession 1.34x
1.13x
1.15x 7.02%
9.42%
7.80%
6 Longer concession
4 3All Case 4 + Case 70.00%
80.00%
1.32x
1.28x 7.80%
Case 7 10.84%
8.28%
All
+ Longer
aero
& Increased +gearing
debt
upconcession
Longer &tenor
+ debt 70.00%
80.00%
Increased
tenor
All 1.28x
1.33x
gearingAll 8.28%
+ aero up11.05%
1.13x 9.42%
6 Yr(s)
All & 30
Increased
30 Yr(s) 9.42%
1.32x30 Yr(s)10.84%
7 All + aero 25
upYr(s) 80.00%25 Yr(s) 1.32x
25 Yr(s) 1.33x25 Yr(s)10.84%
11.05%
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
Distributions Debt service Capex Tax Operation cost

NEGOTIATIONS & OPTIMIZATIONS DataName

Data
1 Base Name
validation Gearing
Base validation 70.00%
Min DSCR Equity IRR
70.00% Min DSCR

Gearing
1.15x
1.15x Equity
6.66%
6.66%
IRR
Base Name
2 Annuity Gearing
70.00% Min DSCR 1.15x Equity
1.34x IRR
7.02%
6.66%
Scenario manager 3 Base concession
1 Longer
Base 70.00% 1.15x 6.66%
7.80%
1
4 Base
2 Longer
Annuityconcession + debt tenor 70.00% 1.15x
1.28x
1.34x 6.66%
8.28%
7.02%
Case number Case 1
2
5 Annuity&
3 Longer 70.00%
Increased gearing 80.00%
concession 1.34x
1.13x
1.15x 7.02%
9.42%
7.80%
6 Longer concession
4 3All Case 4 + Case 70.00%
80.00%
1.32x
1.28x 7.80%
Case 7 10.84%
8.28%
All
+ Longer
aero
& Increased +gearing
debt
upconcession
Longer &tenor
+ debt 70.00%
80.00%
Increased
tenor
All 1.28x
1.33x
gearingAll 8.28%
+ aero up11.05%
1.13x 9.42%
6 Yr(s)
All & 30
Increased
30 Yr(s) 9.42%
1.32x30 Yr(s)10.84%
7 All + aero 25
upYr(s) 80.00%25 Yr(s) 1.32x
25 Yr(s) 1.33x25 Yr(s)10.84%
11.05%
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
-
Distributions Debt service Capex Tax Operation cost


Scenario manager
Case number Case 1

Longer concession
Longer
+ debt
& Increased
tenor
Gearing ratio % 70.00% 70.00% 80.00% 80.00% 80.00%
Data validation
Base 70.00% 1.15x 6.66%
1 Base 70.00% 1.15x 6.66%
2 Annuity 70.00% 1.34x 7.02%
3 Longer concession 70.00% 1.15x 7.80%
4 Longer concession + debt tenor
70.00% 1.28x 8.28%
5 Longer & Increased gearing 80.00% 1.13x 9.42%
6 All 80.00% 1.32x 10.84%
7 All + aero up 80.00% 1.33x 11.05%
Senior debt
Amount Invested GBP M 7,000 8,000 8,000 OK • Max debt = GBP [8] bn
Min DSCR x 1.15x 1.33x 1.20x OK • Min DSCR = 1.20x [project has demand risk]
Equity
IRR x 6.66% 11.05% 11.00% OK • Min IRR – 11% p.a.
NPV @ Target IRR GBP M (1,016) 8 - OK • Min equity to invest: GBP 2bn
CAA

Boot Module - Heathrow Model Slides

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Classification: Internal

BOOT: PROJECT FINANCE

1 Learn business case of a regulated airport

2 Understand the main PF components in a deal

3 Understand the complexities

4 Learn the process for optimizing a deal

BUSINESS CASE OF AN AIRPORT

Non-aero rev Carpark

BUSINESS CASE OF AN AIRPORT

Regulated Aero rev

40% Equity 11% p.a.

WACC = 60% * 5% p.a. + 40% * 11% p.a.

Aero rev Opex

Aero rev Opex

RAB * RAB * RAB * RAB* RAB* RAB* RAB*

REVENUE PER PAX

Aero rev Opex

REVENUE PER PAX

Aero rev Opex

8 years 7 years 25+ years

Project Development Construction Operations

8 years 3 years 25/30 years

Project Development Construction Operations

Project Development Construction Operations

1 Uses of capital (e.g. £10bn construction + IDC + financing fees)

2 Sources of capital (e.g. debt + equity)

3 Revenue: aero (price x volume) & non-aero (not broken down)

4 Opex & Capex: Simple assumptions – no major lifecycle capex

5 Debt – Principal: Fixed repayment style vs annuity

6 Debt – Interest: All-in rate vs base rate + margin

7 Tax: Simple tax calculation vs tax depreciation & tax losses

Operations – cashflows & metrics

8 CFADS & CFAE – simple structure

9 DSCR – Debt Service Coverage Ratio – CFADS / [Interest + Principal]

11 Equity IRR – returns to equity holders

12 Project IRR – returns to debt & equity

13 Negotiations & optimizations

i Debt – max gearing & min DSCR

ii Equity – min IRR

iii CAA – acceptable to consumers

13 Negotiations & optimizations – using a scenario manager

i Debt – annuity style of repayment

ii Longer concession – an extra 5 years of revenues

iii Longer debt tenor – an extra 5 years to repay debt

iv Increased gearing – debt finance 80% of capex rather than 70%

v All changes – all simultaneously

Work done to-date

3 Heathrow is a regulated privately held asset. It will collect

3 Heathrow is a regulated privately held asset. It will collect

OPEX & CAPEX

4 Opex & Capex

5 Debt is paid down at regular intervals

5 Debt is paid down at regular intervals

6 Interest is paid annually

7 Tax is paid annually

Tax payable GBP M

7 Tax is paid annually

Tax payable GBP M 94 96 99 102 105 108 111

8 Cashflow Available for Debt Service (CFADS)

8 Cashflow Available for Debt Service (CFADS)

Capex GBP M (350) (350) (350) (350) (350) (350) (350)

DEBT COVENANTS - DSCR