Project Financing: Asset-Based Financial Engineering / Edition 2

Project Financing: Asset-Based Financial Engineering / Edition 2

by John D. Finnerty

ISBN-10: 0470086246

ISBN-13: 9780470086247

Pub. Date: 05/04/2007

Publisher: Wiley

An essential guide to an indispensable area of corporate finance

Around the globe, thousands of high-profile corporate projects are relying on the innovative investment technique known as project financing to service their debt burden and to provide a steady stream of returns to project investors. But without a comprehensive understanding of the process, disasters


An essential guide to an indispensable area of corporate finance

Around the globe, thousands of high-profile corporate projects are relying on the innovative investment technique known as project financing to service their debt burden and to provide a steady stream of returns to project investors. But without a comprehensive understanding of the process, disasters are sure to happen--witness the financial fiascoes at Euro Disney and The Eurotunnel Project. This timely guide shows corporate finance pros and project planners how to get project financing right. Using examples and case studies, it takes readers through all the necessary steps and processes, from assessing risk and making security arrangements to preparing the financial plan and evaluating the project's legal requirements.

JOHN D. FINNERTY (New York, New York) is General Partner in charge of corporate finance at McFarland Dewey & Co and professor of finance at Fordham University.

Product Details

Publication date:
Wiley Finance Series, #386
Edition description:
Product dimensions:
6.46(w) x 9.13(h) x 1.52(d)

Table of Contents

Preface     XV
What Is Project Financing?     1
What is Project Financing?     1
A Historical Perspective     4
Requirements for Project Financing     6
Appropriateness of Project Financing     8
An Example     9
Conclusion     12
The Rationale for Project Financing     13
Prior Studies' Explanations     13
The Need for Contracts     14
The Advantages of Separate Incorporation     14
Countering the Underinvestment Problem     16
Reallocating Free Cash Flow     18
Reducing Asymmetric Information and Signaling Costs     19
More Efficient Structuring of Debt Contracts     21
More Effective Corporate Organization and Management Compensation     21
Project Financing Versus Direct Financing     22
Advantages of Project Financing     22
Disadvantages of Project Financing     29
Conclusion     30
What Is Special about Large Projects?     31
How Large Are "Large" Projects?     32
Length of Project Contracts     36
Initial Project Capital Structure     42
Why Studying Project Finance Is Useful     46
Why Study How Large Projects Are Financed?     50
Conclusion     52
Who Finances Large Projects?     53
Sources of Funds for Large Projects     53
Project Bonds' Default Risk     57
Lead Arrangers, Managing Underwriters, and Advisors     65
Conclusion     68
Analyzing Project Viability     70
Technical Feasibility     70
Economic Viability     72
Creditworthiness     74
Conclusion as to Viability     75
Assessing Project Risks     76
Completion Risk     76
Technological Risk     77
Raw Material Supply Risk     78
Economic Risk     78
Financial Risk     79
Currency Risk     81
Political Risk     82
Environmental Risk     84
Force Majeure Risk     84
Implications for Project Financing     85
The Cogeneration Project     85
Conclusion     87
Designing Security Arrangements     88
Purpose of Security Arrangements     89
Direct Security Interest in Project Facilities     90
Security Arrangements Covering Completion     91
Security Arrangements Covering Debt Service     92
Types of Purchase and Sale Contracts     93
Raw Material Supply Agreements     97
Supplemental Credit Support     98
Insurance     99
The Cogeneration Project     100
Conclusion     102
Structuring the Project     103
Undivided Joint Interest     103
Corporation     111
Partnership     114
Limited Liability Company     118
The Cogeneration Project     119
Conclusion     121
Preparing the Project Financing Plan     122
General Considerations     122
Construction Financing     126
Long-Term Financing     127
Withholding Tax Considerations     129
Estimating the Borrowing Capacity of a Project     129
Loan Repayment Parameters     130
Borrowing Capacity, Assuming Full Drawdown Immediately Prior to Project Completion     130
Borrowing Capacity, Assuming Periodic Loan Drawdowns     134
Application to a Hypothetical High-Speed Rail Project     135
Annual Coverage Tests     138
Conclusion      139
Discounted Cash Flow Analysis     141
Incremental After-Tax Cash Flows     142
The Hurdle Rate     148
Estimating the Cost of Capital for a Project     153
Net Present Value Analysis     156
Internal Rate of Return Analysis     157
Comparing IRR and NPV Analyses     159
Conclusion     163
Financial Modeling and Project Evaluation     164
Preparing Cash Flow Projections     164
Preparing Projected Financial Statements     171
Evaluating a Project's Debt Capacity     173
Measuring Expected Rates of Return     175
Sensitivity Analysis     182
Conclusion     184
Using Real-Options Analysis to Evaluate a Project     186
Description of the Oil Field Project     186
Project's Real Options     187
Evaluating the Project     190
Traditional DCF Analysis     205
Sensitivity of Option Value to Oil Price Volatility and to Reserve Dispersion     206
Conclusion     208
Sources of Project Funds     209
Equity     210
Long-Term Debt Market     213
Commercial Bank Loans     214
Fixed-Rate Debt Market     219
International Capital Market     227
Supplier Credits     231
Governmental Assistance     231
World Bank Loans     236
Inter-American Development Bank     237
Local Sources of Capital     237
Conclusion     238
Managing Project Risks     240
Interest-Rate Swaps     240
Credit Default Swaps     245
Options     251
Forwards and Futures     257
Hedging     260
Hedging with Options     262
Hedging Foreign Exchange Risk     265
Conclusion     272
Issues for the Host Government     273
Contribution to the Host Jurisdiction's Economic Development     273
Host Jurisdiction's Expected Economic Return     274
Impact on the Availability of Hard Currency     275
Exposure of the Host Government to the Project's Obligation to Repay Project Debt     276
Desirability of Precedents     277
Hibernia Oil Field Project     277
Public-Private Infrastructure Partnerships     278
Public-Private Financing Structures     280
Legislative Provisions that Can Affect Public-Private Partnerships     283
Conclusion     287
Case Study: The Indiantown Cogeneration Project     288
Project Description     288
The Partnership and the Sponsors of the Project     293
Principal Project Contracts     296
Projected Operating Results     302
Project Financing     306
Conclusion     318
Case Study: The Tribasa Toll Road Project     319
The Mexican Government's Toll Road Program     319
Infrastructure Financing Alternatives     321
Risk Considerations in Foreign Infrastructure Projects     321
Tribasa Toll Road Trust 1 Financing     324
Credit Analysis     329
Risk Minimization Features     333
Conclusion     337
Case Study: The Euro Disneyland Project     338
Introduction     338
Project Description     339
Disney     340
Project Ownership Structure     340
Master Agreement with the French Government     344
Project Financing     346
Interests of the Participants in the Project     349
Financial Projections     355
Valuation     355
Corporate Governance Issues     364
Operating Results     364
Subsequent Developments     366
Conclusion     367
Case Study: The Eurotunnel Project     368
Historical Background     369
The Eurotunnel System     370
Project Ownership Structure     371
Construction     372
Project Financing     373
Economic Risk     375
Projected Financial Results     380
Project Debt Financing     382
Project Equity Financing     387
Sensitivity Analysis     390
Subsequent Developments     391
Conclusion     392
Conclusion     394
Reaping the Benefits of Project Financing     394
Recognizing When Project Financing can be Beneficial     396
Potential Future Applications of Project Financing     397
Organizational (Re)form     398
Financial Engineering     398
Comparative Terms of Selected Projects     401
Other Examples of Project Financings     413
Legal Investment Requirements Governing New York Life Insurance Companies     427
Bibliography     433
Useful Web Sites      441
Notes     443
Index     459

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