Title Details

Preface xv

CHAPTER 1 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

CHAPTER 2 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

CHAPTER 3 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

CHAPTER 4 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

CHAPTER 5 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

CHAPTER 6 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

CHAPTER 7 Structuring the Project 103

Undivided Joint Interest 103

Corporation 111

Partnership 114

Limited Liability Company 118

The Cogeneration Project 119

Conclusion 121

CHAPTER 8 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

CHAPTER 9 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

CHAPTER 10 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

CHAPTER 11 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

CHAPTER 12 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

CHAPTER 13 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

CHAPTER 14 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

CHAPTER 15 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

CHAPTER 16 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

CHAPTER 17 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

CHAPTER 18 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

CHAPTER 19 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

APPENDIX A Comparative Terms of Selected Projects 401

APPENDIX B Other Examples of Project Financings 413

APPENDIX C Legal Investment Requirements Governing New York Life Insurance Companies 427

Bibliography 433

Useful Web Sites 441

Notes 443

Index 459