Q1. Company A is offered two five year project loans on the following terms:
Principal: $100 M
Interest Rate: LIBOR + 2% (assume LIBOR is 5%)
Advisory Fee: $100k Retainer + .75% Success Fee
Arranging Fee: 1.5%
Out of Pocket Expenses: $500 k upfront and $100 p.a.
Repayment: $50 M each at end of Years 4 and 5
Borrowers tax rate: 30%
Principal: $100 M
Interest Rate: 8%
Advisory Fee: $500k
Arranging Fee: 1.0%
Out of Pocket Expenses: $500 k upfront.
Repayment: $100 M at end of Year 5
Borrowers tax rate: 30%
Set up the cash flows to calculate both financing's 'all-in' cost, both before and after taxes. Assume that all fees and expenses are tax deductible and are paid in Time 0, except where noted otherwise. By inspection, which offer looks more economically attractive? Give a reason to support your preference.
2. Borrower B is seeking to project finance an oil field and it would like to maximize leverage. B's project economics assume a 40% tax and are exposed to oil price volatility but the project has a long reserve life. B receives two offers with the following terms:
Arranger 1: Syndicated Loan: $500 M principal
Interest and Fees: LIBOR +3%; 1.5% upfront
Tenor: 8 Years; even amortization begins in year 5
Arranger 2: Club Deal: $600 M principal
Interest and Fees: LIBOR +3.25%; 2% upfront
Tenor: 10 Years; even amortization begins in year 7
Which deal would you recommend to B? Give at least 2 reasons to justify your answer.