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. Because of this, the company and
its banks restructured the financing. Cap des Biches did a debt-for-equity
swap, reducing its bank debt from EUR110 million to EUR67 million but paying
a higher interest rate of 14% on the remaining debt.
Three years later, the debt had been reduced to EUR25 million and
earnings were solid and growing steadily. The company's owners now had the
opportunity to take advantage of the turnaround. The summary financial statements
were as follows:
One of the orignal shareholders, IFC Ventures, argued that since
there was good cash flow, Cap des Biches could do a leveraged recapitalization.
This would mean raising a considerable amount of debt and paying shareholders
a large, one-shot dividend with the proceeds. Rates were down, and several
banks had indicated a willingness to lend money at a rate of about 11% as
long as it could be paid down within 8 years and the interest coverage ratio
did not fall below 2. This would make the company more leveraged and therefore
more risky for all shareholders, however, raising the required return to about
Another possibilty was to take on additional debt and use the money
to buy out the banks' shareholding. After all, the banks only held shares
because they were forced to, and they would be happy to get cash instead,
especially if it meant recovering all their pre-restructuring EUR110 loan
plus 14% p.a. interest.
1. What is Cap des Biches worth?