Project Financing: Asset-Based Financial Engineering

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John Wiley & Sons, Jan 4, 2011 - Business & Economics - 496 pages
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Praise for
Project Financing
First Edition

"Owing to his teaching as a finance professor and as an experienced investment banker, John Finnerty brings to his book, Project Financing, an insightful perspective, blending the theoretical with the practical."
--Zoltan Merszei, former chairman, president, and CEO, The Dow Chemical Company

"Finnerty has managed to distill the complexities of project financing with its myriad components and variations. Clear, practical, and in-depth, Project Financing is a valuable user's guide for project sponsors, regulators, host governments (local and foreign), and financiers alike."
--Ricardo M. Campoy, Director, Kilgore Minerals Ltd.

"Project Financing warrants a place in the essential libraries of corporate financial managers, their advisors, senior strategists, bankers, large private investors, government officials, and anyone who aspires to master innovation in corporate finance."
--Robert F. Bruner, Dean and Charles C. Abbott Professor of Business Administration, Darden Graduate School of Business Administration, University of Virginia

"This book is the first comprehensive treatment of project financing. It provides an invaluable contribution to financial management literature and practice."
--Andrew H. Chen, Distinguished Professor of Finance, Southern Methodist University

 

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Contents

What Is Project Financing?
1
A Historical Perspective
4
Requirement for Project Financing
6
Appropriateness of Project Financing
8
An Example
9
Conclusion
12
The Rationale for Project Financing
13
The Need for Contracts
14
Projects 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
LongTerm Debt Market
213

Countering the Underinvestment Problem
16
Reallocating Free Cash Flow
18
Reducing Asymmetric Information and Signaling Costs
19
More Efficient Structuring of Debt Contracts
21
Project Financing Versus Direct 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
Project Bonds Default Risk
58
Lead Arrangers Managing Underwriters and Advisors
65
Conclusion
68
Analyzing Project Viability
70
Economic Viability
72
Creditworthiness
74
Conclusion as to Viability
75
Assessing Project Risks
76
Technological Risk
77
Raw Material Supply Risk
78
Financial Risk
79
Currency Risk
81
Political Risk
82
Environmental Risk
84
Implications for Project Financing
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
Corporation
111
Partnership
114
Limited Liability Company
119
Conclusion
121
Preparing the Project Financing Plan
122
Construction Financing
126
LongTerm Financing
127
Withholding Tax Considerations
129
Loan Repayment Parameters
130
Borrowing Capacity Assuming Periodic Loan Drawdowns
134
Application to a Hypothetical HighSpeed Rail Project
135
Annual Coverage Tests
138
Conclusion
139
Discounted Cash Flow Analysis
141
Incremental AfterTax 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 Projected Financial Statements
171
Evaluating a Projects Debt Capacity
173
Measuring Expected Rates of Return
175
Sensitivity Analysis
182
Conclusion
184
Using RealOptions Analysis to Evaluate a Project
186
Commercial Bank Loans
214
FixedRate Debt Market
219
International Capital Market
227
Supplier Credits
231
World Bank Loans
236
InterAmerican Development Bank
237
Conclusion
238
Managing Project Risks
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
Host Jurisdictions Expected Economic Return
274
Impact on the Availability of Hard Currency
275
Exposure of the Host Government to the Projects Obligation to Repay Project Debt
276
Desirability of Precedents
277
PublicPrivate Infrastructure Partnerships
278
PublicPrivate Financing Structures
280
Legislative Provisions that Can Affect PublicPrivate Partnerships
283
Conclusion
287
Case Study The Indiantown Cogeneration Project
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
Infrastructure Financing Alternative
321
Tribasa Toll Road Trust 1 Financing
324
Credit Analysis
329
Risk Minimization Features
333
Conclusion
337
Case Study The Euro Disneyland Project
338
Project Description
339
Disney
340
Master Agreement with the French Government
344
Project Financing
346
Interests of the Participants in the Project
349
Financial Projections
355
Corporate Governance Issues
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
Recognizing When Project Financing can be Beneficial
396
Potential Future Applications of Project Financing
397
Organizational Reform
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
Copyright

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About the author (2011)

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.

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