Cash Flow Forecasting

In this chapter we will look at the case of a special purpose vehicle

designed to build a housing subdivision for expatriates in a foreign country,

as this injects an element of juridical uncertainty into the equation and

necessitates building financial projections without the use of a balance

sheet or historical data. In effect, you, as an analyst, are forming a set of

financial projections without any underlying historical financial data.

In this example, your bank is being approached to participate in a syndi-

cated loan facility whose terms and conditions are summarized as follows.

Details of project and borrower

Borrower OASIS RESIDENCES (Durakistan) Ltd

Amount €2,000,000 participation in a €8,000,000 loan (it is

proposed that the bank should act as Agent Bank)

Purpose To finance the construction of 40 executive houses in

Durakistan, a small country in the Middle East, together

with associated engineering and site works

Period of drawdown Eighteen months from date of loan

Repayment Five equal annual instalments of €1,600,000

commencing 12 months from date of loan agreement

Security offered Charge over the project plus the possibility of a

by customer guarantee from Oasis Residences (International) Ltd

Interest rate Tentatively 8%

Oasis Residences (International) Ltd., the international arm of the Oasis

Residences Group PLC, has formed a new company – Oasis Residences

(Durakistan) Ltd – for the purpose of the above project. Oasis Residences

(International) Ltd does not, however, have any equity interest in this

new company. Local interests wholly own it under the law of the land.

The borrower has entered into a form of agreement with the Emir of

Durakistan to lease a plot of land in Durakistan, and will enter into fur-

ther contracts with Oasis Residences (Homes) Ltd UK for the supply and

erection of 40 prefabricated houses.

The engineering, ancillary site works etc. will be carried out by local

subcontractors. The company advises that the demand for houses of this

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nature from international companies operating in Durakistan for their

expatriate staff is strong. In view of the serious shortage of accommodation

in the area, no difficulty is foreseen in letting the houses; in fact, a number

of Letters of Intent to lease the houses are already being negotiated.

Repayment of the loan will come from the rental income, after deduc-

tion of overheads, payments under the Head Lease, etc.

The Oasis Residences Group is a good customer of the bank, but the

bank’s General Management Committee has recommended that further

exposure should be on a secured basis only. The legal opinion and cash

flow have been obtained, and extracts are reproduced here.

The following legal opinion has been received from the bank’s lawyer:

The ‘Head Lease’ of the land constitutes an agreement whereby the

use of the land, and all proceeds there from, are granted by the lessor

to Oasis Residences (Durakistan) Ltd for a period of ten years. Oasis

Residences (Durakistan) Ltd have an obligation under the agreement

to complete the housing project up to local building standards within

period of two years at a cost of not less than €8 million. This is to

ensure sufficient expenditure in Durakistan and on the project. If it

does not comply with this obligation within the specified two years,

the lessor has the right to terminate the agreement and reclaim the

land. At the end of the ten-year lease period, ownership of the land,

the housing and all proceeds there from revert to the lessor.

This is necessarily a rather artificial agreement when considered in

the light of the whole transaction, and we feel that we should add

the following general comments. The Law of the State of Durakistan

relating to the business of contracts of works requires that all com-

panies must either be wholly owned by a Durakistani national or be

granted a Durakistani decree of exemption before it can operate

in this field. At the present the authorities are not issuing such

decrees, and so the majority of construction companies are operat-

ing by supplying a Durakistani company with management and

expert construction advice. In practice, this means that their pos-

ition is exactly the same as set out in the agreement. This fact is fully

Cash Flow Forecasting

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