Prof. Ian Giddy, New York University
The Cap des Biches Power Company, located about 20 kilometers east of Dakar at Cap des Biches in Senegal, consisted of a 56-MW, oil-fired elctricity generating power plant . The IPP (Independent Power Producer) plant uses naphtha fuel produced at the nearby SAR refinery.
In late 2004 the company had been bought by management and an international venture capital group by means of a leveraged buy-out (LBO). This meant borrowing EUR30 million from the seller, GTI, and another EUR120 million from Credit Lyonnais and other banks. The interest rates were 15% and 12% respectively.
Two years after the LBO, the company was having difficulty paying the interest and principal on its debt. The reason was lower than expected demand for power, and higher costs of naphta fuel. Based on last year's performance, management estimated NOI at EUR14.00 million for the year 2006 and EUR16 million for 2007. Discussions with the banks confirmed that in order to avoid violating covenants, a minimum NOI interest coverage ratio of 2 must be maintained.
The company had so far managed to pay off all its subordinated debt
of EUR30 million, and EUR10 million of its bank debt, leaving EUR110 million
to be paid. The agreement with the banks specified that a minimum of EUR20
million was to be paid every year. As a result of an agreement with the Government
of Sengal, Cap des Biches negotiated a tax holiday for five years, but it
still looked as though it was having trouble meeting its obligations.
1. Can the Cap des Biches afford to pay its required interest
and principal this year? Next year?