Project financing : asset-based financial engineering

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This timely book describes an innovative financing technique, using examples and case studies such as Euro Disneyland and the Eurotunnel to walk readers through its essential steps and procedures. Analyzes the shortcomings of unsuccessful project financing attempts.

Author Notes

JOHN D. FINNERTY is Director of Houlihan Lokey Howard & Zukin, an investment banking firm, where he specializes in project financing. A professor of finance at Fordham University Graduate School of Business, he previously worked in the Corporate Finance Departments of Lazard Frères & Co., Morgan Stanley & Co., and as the Chief Financial Officer at College Savings Bank in Princeton, New Jersey.

Preface	p. XV
Chapter 1 What Is Project Financing?	p. 1
What is Project Financing?	p. 1
A Historical Perspective	p. 4
Requirements for Project Financing	p. 6
Appropriateness of Project Financing	p. 8
An Example	p. 9
Conclusion	p. 12
Chapter 2 The Rationale for Project Financing	p. 13
Prior Studies' Explanations	p. 13
The Need for Contracts	p. 14
The Advantages of Separate Incorporation	p. 14
Countering the Underinvestment Problem	p. 16
Reallocating Free Cash Flow	p. 18
Reducing Asymmetric Information and Signaling Costs	p. 19
More Efficient Structuring of Debt Contracts	p. 21
More Effective Corporate Organization and Management Compensation	p. 21
Project Financing Versus Direct Financing	p. 22
Advantages of Project Financing	p. 22
Disadvantages of Project Financing	p. 29
Conclusion	p. 30
Chapter 3 What Is Special about Large Projects?	p. 31
How Large Are "Large" Projects?	p. 32
Length of Project Contracts	p. 36
Initial Project Capital Structure	p. 42
Why Studying Project Finance Is Useful	p. 46
Why Study How Large Projects Are Financed?	p. 50
Conclusion	p. 52
Chapter 4 Who Finances Large Projects?	p. 53
Sources of Funds for Large Projects	p. 53
Project Bonds' Default Risk	p. 57
Lead Arrangers, Managing Underwriters, and Advisors	p. 65
Conclusion	p. 68
Chapter 5 Analyzing Project Viability	p. 70
Technical Feasibility	p. 70
Economic Viability	p. 72
Creditworthiness	p. 74
Conclusion as to Viability	p. 75
Assessing Project Risks	p. 76
Completion Risk	p. 76
Technological Risk	p. 77
Raw Material Supply Risk	p. 78
Economic Risk	p. 78
Financial Risk	p. 79
Currency Risk	p. 81
Political Risk	p. 82
Environmental Risk	p. 84
Force Majeure Risk	p. 84
Implications for Project Financing	p. 85
The Cogeneration Project	p. 85
Conclusion	p. 87
Chapter 6 Designing Security Arrangements	p. 88
Purpose of Security Arrangements	p. 89
Direct Security Interest in Project Facilities	p. 90
Security Arrangements Covering Completion	p. 91
Security Arrangements Covering Debt Service	p. 92
Types of Purchase and Sale Contracts	p. 93
Raw Material Supply Agreements	p. 97
Supplemental Credit Support	p. 98
Insurance	p. 99
The Cogeneration Project	p. 100
Conclusion	p. 102
Chapter 7 Structuring the Project	p. 103
Undivided Joint Interest	p. 103
Corporation	p. 111
Partnership	p. 114
Limited Liability Company	p. 118
The Cogeneration Project	p. 119
Conclusion	p. 121
Chapter 8 Preparing the Project Financing Plan	p. 122
General Considerations	p. 122
Construction Financing	p. 126
Long-Term Financing	p. 127
Withholding Tax Considerations	p. 129
Estimating the Borrowing Capacity of a Project	p. 129
Loan Repayment Parameters	p. 130
Borrowing Capacity, Assuming Full Drawdown Immediately Prior to Project Completion	p. 130
Borrowing Capacity, Assuming Periodic Loan Drawdowns	p. 134
Application to a Hypothetical High-Speed Rail Project	p. 135
Annual Coverage Tests	p. 138
Conclusion	p. 139
Chapter 9 Discounted Cash Flow Analysis	p. 141
Incremental After-Tax Cash Flows	p. 142
The Hurdle Rate	p. 148
Estimating the Cost of Capital for a Project	p. 153
Net Present Value Analysis	p. 156
Internal Rate of Return Analysis	p. 157
Comparing IRR and NPV Analyses	p. 159
Conclusion	p. 163
Chapter 10 Financial Modeling and Project Evaluation	p. 164
Preparing Cash Flow Projections	p. 164
Preparing Projected Financial Statements	p. 171
Evaluating a Project's Debt Capacity	p. 173
Measuring Expected Rates of Return	p. 175
Sensitivity Analysis	p. 182
Conclusion	p. 184
Chapter 11 Using Real-Options Analysis to Evaluate a Project	p. 186
Description of the Oil Field Project	p. 186
Project's Real Options	p. 187
Evaluating the Project	p. 190
Traditional DCF Analysis	p. 205
Sensitivity of Option Value to Oil Price Volatility and to Reserve Dispersion	p. 206
Conclusion	p. 208
Chapter 12 Sources of Project Funds	p. 209
Equity	p. 210
Long-Term Debt Market	p. 213
Commercial Bank Loans	p. 214
Fixed-Rate Debt Market	p. 219
International Capital Market	p. 227
Supplier Credits	p. 231
Governmental Assistance	p. 231
World Bank Loans	p. 236
Inter-American Development Bank	p. 237
Local Sources of Capital	p. 237
Conclusion	p. 238
Chapter 13 Managing Project Risks	p. 240
Interest-Rate Swaps	p. 240
Credit Default Swaps	p. 245
Options	p. 251
Forwards and Futures	p. 257
Hedging	p. 260
Hedging with Options	p. 262
Hedging Foreign Exchange Risk	p. 265
Conclusion	p. 272
Chapter 14 Issues for the Host Government	p. 273
Contribution to the Host Jurisdiction's Economic Development	p. 273
Host Jurisdiction's Expected Economic Return	p. 274
Impact on the Availability of Hard Currency	p. 275
Exposure of the Host Government to the Project's Obligation to Repay Project Debt	p. 276
Desirability of Precedents	p. 277
Hibernia Oil Field Project	p. 277
Public-Private Infrastructure Partnerships	p. 278
Public-Private Financing Structures	p. 280
Legislative Provisions that Can Affect Public-Private Partnerships	p. 283
Conclusion	p. 287
Chapter 15 Case Study: The Indiantown Cogeneration Project	p. 288
Project Description	p. 288
The Partnership and the Sponsors of the Project	p. 293
Principal Project Contracts	p. 296
Projected Operating Results	p. 302
Project Financing	p. 306
Conclusion	p. 318
Chapter 16 Case Study: The Tribasa Toll Road Project	p. 319
The Mexican Government's Toll Road Program	p. 319
Infrastructure Financing Alternatives	p. 321
Risk Considerations in Foreign Infrastructure Projects	p. 321
Tribasa Toll Road Trust 1 Financing	p. 324
Credit Analysis	p. 329
Risk Minimization Features	p. 333
Conclusion	p. 337
Chapter 17 Case Study: The Euro Disneyland Project	p. 338
Introduction	p. 338
Project Description	p. 339
Disney	p. 340
Project Ownership Structure	p. 340
Master Agreement with the French Government	p. 344
Project Financing	p. 346
Interests of the Participants in the Project	p. 349
Financial Projections	p. 355
Valuation	p. 355
Corporate Governance Issues	p. 364
Operating Results	p. 364
Subsequent Developments	p. 366
Conclusion	p. 367
Chapter 18 Case Study: The Eurotunnel Project	p. 368
Historical Background	p. 369
The Eurotunnel System	p. 370
Project Ownership Structure	p. 371
Construction	p. 372
Project Financing	p. 373
Economic Risk	p. 375
Projected Financial Results	p. 380
Project Debt Financing	p. 382
Project Equity Financing	p. 387
Sensitivity Analysis	p. 390
Subsequent Developments	p. 391
Conclusion	p. 392
Chapter 19 Conclusion	p. 394
Reaping the Benefits of Project Financing	p. 394
Recognizing When Project Financing can be Beneficial	p. 396
Potential Future Applications of Project Financing	p. 397
Organizational (Re)form	p. 398
Financial Engineering	p. 398
Appendix A Comparative Terms of Selected Projects	p. 401
Appendix B Other Examples of Project Financings	p. 413
Appendix C Legal Investment Requirements Governing New York Life Insurance Companies	p. 427
Bibliography	p. 433
Useful Web Sites	p. 441
Notes	p. 443
Index	p. 459

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