Project finance

Topics: Finance, Risk, Debt Pages: 54 (5631 words) Published: November 13, 2013
Project finance
Aditya Agarwal
Sandeep Kaul
Fuqua School of Business

Contents









The MM Proposition
What is a Project?
What is Project Finance?
Project Structure
Financing choices
Real World Cases
Project Finance: Valuation Issues
The MM Proposition

The MM Proposition
“The Capital Structure is irrelevant as long as the
firm’s investment decisions are taken as given”
Then why do corporations:
 Set up independent companies to undertake
mega projects and incur substantial transaction
costs, e.g. Motorola-Iridium.
 Finance these companies with over 70% debt
inspite of the projects typically having substantial
risks and minimal tax shields, e.g. Iridium: very
high technology risk and 15% marginal tax rate.

Contents
The MM Proposition
 What is a Project?
 What is Project Finance?
 Project Structure
 Financing choices
 Real World Cases
 Project Finance: Valuation Issues


What is a project?
High operating margins.
 Low to medium return on capital.
 Limited Life.
 Significant free cash flows.
 Few diversification opportunities. Asset
specificity.


What is a project?


Projects have unique risks:


Symmetric risks:







Asymmetric downside risks:





Demand, price.
Input/supply.
Currency, interest rate, inflation.
Reserve (stock) or throughput (flow).
Environmental.
Creeping expropriation.

Binary risks






Technology failure.
Direct expropriation.
Counterparty failure
Force majeure
Regulatory risk

What does a Project need?
Customized capital structure/asset specific
governance systems to minimize cash flow
volatility and maximize firm value.

Contents
The MM Proposition
 What is a Project?
 What is Project Finance?
 Project Structure
 Financing choices
 Real World Cases
 Project Finance: Valuation Issues


What is Project Finance?
Project Finance involves a corporate
sponsor investing in and owning a single
purpose, industrial asset through a legally
independent entity financed with nonrecourse debt.

Project Finance – An Overview


Outstanding Statistics






Over $220bn of capital expenditure using project finance in 2001 $68bn in US capital expenditure
Smaller than the $434bn corporate bonds market, $354bn asset backed securities market and $242bn leasing market, but larger than the $38bn IPO and $38bn Venture capital market

Some major deals:





$4bn Chad-Cameroon pipeline project
$6bn Iridium global satellite project
$1.4bn aluminum smelter in Mozambique
€900m A2 Road project in Poland

Total Project Finance Investment

•Overall 5-Year CAGR of 18% for private sector investment. •Project Lending 5-Year CAGR of 23%.

Number of Projects

Lending by Type of Debt

Project Finance Lending by Sector

• 37% of overall lending in Power Projects, 27% in telecom. • 5-Year CAGR for Power Projects: 25%, Oil & Gas:21% and
Infrastructure: 22%.

Contents
The MM Proposition
 What is a Project?
 What is Project Finance?
 Project Structure
 Financing choices
 Real World Cases
 Project Finance: Valuation Issues


Project Structure
Structure highlights
 Comparison with other Financing Vehicles
 Disadvantages
 Motivations
 Alternative approach to Risk Mitigation


Structure Highlights



Independent, single purpose company formed to build
and operate the project.
Extensive contracting





As many as 15 parties in upto 1000 contracts.
Contracts govern inputs, off take, construction and operation. Government contracts/concessions: one off or operate-transfer. Ancillary contracts include financial hedges, insurance for Force Majeure, etc.

Structure Highlights


Highly concentrated equity and debt ownership






One to three equity sponsors.
Syndicate of banks and/or financial institutions provide credit. Governing Board comprised of mainly...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Business Policy/Finance Essay
  • Pioneer petroleum Essay
  • Finance Essay
  • Essay on Finance Practice
  • Business Finance Essay
  • Finance and Question Essay
  • Project Finance Essay
  • What Is Finance? Essay

Become a StudyMode Member

Sign Up - It's Free