Project Financing: Asset-Based Financial Engineering(386 Wiley Finance)

Table of Contents:
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

About the Author :
John D. Finnerty, PhD, is a Professor of Finance at Fordham University and Director of the MS in Quantitative Finance Program. He is also Managing Principal of Finnerty Economic Consulting, LLC, which specializes in business valuation, securities valuation, solvency analysis, calculation of damages, and litigation support. Finnerty has testified as an expert in valuation, securities, and other financial matters in federal and state court, and in arbitration and mediation proceedings. His research focuses on corporate finance, including project financing, and fixed income securities and derivatives valuation. Finnerty?has published twelve books, including the first edition of Project Financing, and more than eighty articles and professional papers. Finnerty is currently President of FIASI and Vice President of the Eastern Finance Association. John D. Finnerty, PhD, is a Professor of Finance at Fordham University and Director of the MS in Quantitative Finance Program. He is also Managing Principal of Finnerty Economic Consulting, LLC, which specializes in business valuation, securities valuation, solvency analysis, calculation of damages, and litigation support. Finnerty has testified as an expert in valuation, securities, and other financial matters in federal and state court, and in arbitration and mediation proceedings. His research focuses on corporate finance, including project financing, and fixed income securities and derivatives valuation. Finnerty?has published twelve books, including the first edition of Project Financing, and more than eighty articles and professional papers. Finnerty is currently President of FIASI and Vice President of the Eastern Finance Association.