Description
The document describing the various risks faced by Texas High Speed Rail Corporation
Risks faced by THSRC Load Factors: The project was deemed to be uneconomic since it could not realize enough load factors to produce an adequate rate of return. The fact that it would be able to be compete with the airfares was questionable. It had become feasible only when they had thought of cooperating with airlines to deliver passengers from the outlying parts to the DFW hub. This was totally dependent on the airlines response to the offer as well as the passenger’s approval and hence a risky proposal. Competition from airlines, especially Southwest: Though careful thought had shown that Southwest would not engage in price wars as it would not be profitable to both the parties, Southwest filing a lawsuit against THSRC was a clear indication that it would face tough competition from Southwest going forward. This became very risky since about 35% of expected revenues came from the common segment targeted by both the parties. Completion risk: Being in the rail road business, which required a lot of capital investment upfront, THSRC faced an immense amount of risk with respect to completion. Unless completed, the project was completely useless to the corporation. Strict timetable: THSRC could not rely on anything else except its own financing plan as it had no access to any state grants, subsisdies, tax breaks, or credit support. Moreover, it was essential that everything went along timely, ex. Securing of funds, construction along with a good financial cushion for any sort of setbacks. Also, it was necessary that the entire project still remained attractive to future outside investors. Financial Program: Equity: The financial program included raising equity in two phases which is a very risky proposal. The first issue may be the easier one being directed to the funders and venture capitalists. However, the second issue would strongly depend on the performance in the gap as well as the market condition at that point of time. Also, even raising equity and not being on schedule on construction would leave the corporation temporarily expensively overfunded. Debt: It was unclear how much AAA and AA rated banking capacity actually would be available to secure the 9-year LOCs. Overall: Again, THSRC’s ability to raise equity and debt was a lot influenced by the investor’s perception of Eurotunnel. It had employed a similar primitive approach which led to significant cost overruns that had forced lenders and investors to supply
more capital or have their ownership diluted. There was also the provision of Federal financing along with the risk and misfortune in case that it was not made available or made available later than THSRC wished. Again, any postponement in raising funds would delay construction and would make it even more difficult to raise capital thus making it a very complicated vicious circle.
General (Country) Risk
Political Risks Political Support risks Taxation risks Nationalization Risks
Delay Risk Cost overrun risk Re-performance risk Completion Risk Loss or Damage to Work
Risks
Construction Risk
Specific Project Risk
Operational Risk
Associated Infrastructure Risks Demand Risk Cost Escalation Risks Loss or Damage to Project Facilities Liability Risk
Financial Risk
Market condition Securing LOC Eurotunnel as a previous failure Funding and timely construction circle
doc_381396056.doc
The document describing the various risks faced by Texas High Speed Rail Corporation
Risks faced by THSRC Load Factors: The project was deemed to be uneconomic since it could not realize enough load factors to produce an adequate rate of return. The fact that it would be able to be compete with the airfares was questionable. It had become feasible only when they had thought of cooperating with airlines to deliver passengers from the outlying parts to the DFW hub. This was totally dependent on the airlines response to the offer as well as the passenger’s approval and hence a risky proposal. Competition from airlines, especially Southwest: Though careful thought had shown that Southwest would not engage in price wars as it would not be profitable to both the parties, Southwest filing a lawsuit against THSRC was a clear indication that it would face tough competition from Southwest going forward. This became very risky since about 35% of expected revenues came from the common segment targeted by both the parties. Completion risk: Being in the rail road business, which required a lot of capital investment upfront, THSRC faced an immense amount of risk with respect to completion. Unless completed, the project was completely useless to the corporation. Strict timetable: THSRC could not rely on anything else except its own financing plan as it had no access to any state grants, subsisdies, tax breaks, or credit support. Moreover, it was essential that everything went along timely, ex. Securing of funds, construction along with a good financial cushion for any sort of setbacks. Also, it was necessary that the entire project still remained attractive to future outside investors. Financial Program: Equity: The financial program included raising equity in two phases which is a very risky proposal. The first issue may be the easier one being directed to the funders and venture capitalists. However, the second issue would strongly depend on the performance in the gap as well as the market condition at that point of time. Also, even raising equity and not being on schedule on construction would leave the corporation temporarily expensively overfunded. Debt: It was unclear how much AAA and AA rated banking capacity actually would be available to secure the 9-year LOCs. Overall: Again, THSRC’s ability to raise equity and debt was a lot influenced by the investor’s perception of Eurotunnel. It had employed a similar primitive approach which led to significant cost overruns that had forced lenders and investors to supply
more capital or have their ownership diluted. There was also the provision of Federal financing along with the risk and misfortune in case that it was not made available or made available later than THSRC wished. Again, any postponement in raising funds would delay construction and would make it even more difficult to raise capital thus making it a very complicated vicious circle.
General (Country) Risk
Political Risks Political Support risks Taxation risks Nationalization Risks
Delay Risk Cost overrun risk Re-performance risk Completion Risk Loss or Damage to Work
Risks
Construction Risk
Specific Project Risk
Operational Risk
Associated Infrastructure Risks Demand Risk Cost Escalation Risks Loss or Damage to Project Facilities Liability Risk
Financial Risk
Market condition Securing LOC Eurotunnel as a previous failure Funding and timely construction circle
doc_381396056.doc