Elsevier S & T

Project Finance in Theory and Practice: Designing, Structuring, and Financing Private and Public Projects

Gatti, Stefano

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Table of contents
  • Cover
  • Contentsvii
  • Forewordxiii
  • Prefacexvii
  • Acknowledgmentsxix
  • About the Authorxxi
  • Chapter 1: Introduction to the Theory and Practice of Project Finance1
  • Introduction1
  • 1.1 What Is Project Finance?2
  • 1.2 Why Do Sponsors Use Project Finance?2
  • 1.3 Who Are the Sponsors of a Project Finance Deal?4
  • 1.3.1 Industrial Sponsors in Project Finance Initiatives Linked to a Core Business4
  • 1.3.2 Public Sponsors with Social Welfare Goals5
  • 1.3.3 Contractor/Sponsors Who Develop, Build, or Run the Plant6
  • 1.3.4 The ‘‘Purely’’ Financial Investor7
  • 1.4 Overview of the Features of Project Finance7
  • 1.4.1 The Contractor and the Turnkey Construction Contract (TKCC)8
  • 1.4.2 Operations and Maintenance Contractor and the O&M Agreement9
  • 1.4.3 Purchasers and Sales Agreements9
  • 1.4.4 Suppliers and Raw Material Supply Agreements (RMSAs)9
  • 1.4.5 Project Finance as a Risk Management Technique10
  • 1.5 The Theory of Project Finance10
  • 1.5.1 Separate Incorporation and Avoidance of Contamination Risk11
  • 1.5.2 Conflicts of Interest Between Sponsors and Lenders and Wealth Expropriation15
  • Chapter 2: The Market for Project Finance: Applications and Sectors19
  • Introduction19
  • 2.1 Historical Evolution of Project Finance and Market Segments19
  • 2.2 The Global Project Finance Market22
  • 2.2.1 A Closer Look at the European Market26
  • 2.2.2 PPP Development27
  • Chapter 3: Project Characteristics, Risk Analysis, and Risk Management31
  • Introduction31
  • 3.1 Identifying Project Risks32
  • 3.1.1 Precompletion Phase Risks33
  • 3.1.2 Postcompletion Phase Risks35
  • 3.1.3 Risks Found in Both the Pre- and Postcompletion Phases35
  • 3.2 Risk Allocation with Contracts Stipulated by the SPV45
  • 3.2.1 Allocation of Construction Risk: The Turnkey (or Engineering, Procurement, and Construction„45
  • 3.2.2 Allocation of Supply Risk: Put-or-Pay Agreements48
  • 3.2.3 Allocation of Operational Risk: Operations and Maintenance (O&M) Agreements49
  • 3.2.4 Allocation of Market Risk49
  • 3.3 Summary of the Risk Management Process61
  • Chapter 4: The Role of Advisors in a Project Finance Deal63
  • Introduction63
  • 4.1 The Role of Legal Advisors in Project Finance Deals64
  • 4.1.1 Legal Advisor, Legal Advisors, and Law Firms: The International Part and Local Legal Counsel65
  • 4.1.2 Project Financing Development Stages and Impacts on the Role of Legal Advisors66
  • 4.2 The Role of the Independent Engineer in Project Finance Deals75
  • 4.2.1 Initial Due Diligence Reporting76
  • 4.2.2 Monitoring Realization of the Project (Engineering and Construction)78
  • 4.2.3 Assistance at the Time of Plant Acceptance83
  • 4.2.4 Monitoring Operations Management87
  • 4.3 Role of Insurance Advisors and Insurance Companies in Project Finance Deals88
  • 4.3.1 Rationale for Using Insurance in Project Finance Deals89
  • 4.3.2 When Should Insurance Products Be Used?90
  • 4.3.3 Areas Where the Insurance Advisor Is Involved91
  • 4.3.4 Types of Conventional and Financial Insurance Products Available for Project Finance Deals93
  • 4.3.5 Integrated Insurance Solutions„Structure and Content97
  • 4.3.6 Classification of Insurance Underwriters98
  • Chapter 5: Valuing the Project and Project Cash Flow Analysis101
  • Introduction101
  • 5.1 Analysis of Operating Cash Flows and Their Behavior in Different Project Life-Cycle Phases102
  • 5.1.1 Inputs for Calculating Cash Flows105
  • 5.2 Defining the Optimal Capital Structure for the Deal116
  • 5.2.1 Equity118
  • 5.2.2 Senior Debt119
  • 5.2.3 VAT Facility121
  • 5.2.4 Stand-by Facility123
  • 5.2.5 Identifying Sustainable Debt/Equity Mixes for Sponsors and Lenders124
  • 5.3 Cover Ratios132
  • 5.3.1 What Cover Ratios Can Tell Us and What They Can’t134
  • 5.3.2 Cover Ratios as an Application of the Certainty Equivalents Method139
  • 5.4 Sensitivity Analysis and Scenario Analysis140
  • 5.4.1 Which Variables Should Be Tested in Sensitivity Analysis?141
  • Chapter 6: Financing the Deal147
  • Introduction147
  • 6.1 Advisory and Arranging Activities for Project Finance Funding147
  • 6.1.1 Advisory Services149
  • 6.1.2 Arranging Services152
  • 6.1.3 Integration of Advisory and Arranging Services153
  • 6.2 Other Roles in Syndicated Loans157
  • 6.3 Fee Structure157
  • 6.3.1 Fees for Advisory Services158
  • 6.3.2 Fees for Arranging Services159
  • 6.3.3 Fees to Participants and the Agent Bank159
  • 6.3.4 Example of Fee Calculation160
  • 6.4 International Financial Institutions and Multilateral Banks162
  • 6.4.1 Multilateral Organizations164
  • 6.4.2 Regional Development Banks171
  • 6.5 Bilateral Agencies: Developmental Agencies and Export Credit Agencies (ECAs)178
  • 6.5.1 Developmental Agencies178
  • 6.5.2 Export Credit Agencies (ECAs)179
  • 6.6 Other Financial Intermediaries Involved in Project Finance183
  • 6.7 Funding Options: Equity186
  • 6.7.1 Timing of the Equity Contribution and Stand-by Equity and Equity Acceleration186
  • 6.7.2 Can Shares in an SPV Be Listed on a Stock Exchange?188
  • 6.8 Funding Options: Mezzanine Financing and Subordinated Debt188
  • 6.9 Funding Options: Senior Debt194
  • 6.9.1 The Base Facility195
  • 6.9.2 Working Capital Facility195
  • 6.9.3 Stand-by Facility196
  • 6.9.4 VAT Facility196
  • 6.9.5 Loan Remuneration196
  • 6.9.6 Loan Currency197
  • 6.9.7 Repayment Options197
  • 6.9.8 Refinancing Loans Already Granted to the SPV201
  • 6.10 Project Leasing208
  • 6.10.1 Valuing the Convenience of a Project Leasing208
  • 6.10.2 The Tax Effect210
  • 6.11 Project Bonds211
  • 6.11.1 Investors in Project Bonds214
  • 6.11.2 Various Categories of Project Bonds215
  • 6.11.3 Municipal Bonds219
  • 6.11.4 When Should Project Bonds Be Used?220
  • 6.11.5 Procedure for Issuing Project Bonds224
  • Chapter 7: Legal Aspects of Project Finance233
  • Introduction233
  • 7.1 The Project Company234
  • 7.1.1 Reasons for Incorporating the Project in a Project Company235
  • 7.1.2 The Project Company as a Joint Venture: Another Reason to Develop a Project in an SPV236
  • 7.1.3 The Project Company and Groups of Companies237
  • 7.1.4 Corporate Documentation: Articles of Incorporation237
  • 7.1.5 Outsourcing the Corporate Functions of the Project Company: How the Company/Project Is Actuall238
  • 7.2 The Contract Structure239
  • 7.2.1 Before the Financing: The Due Diligence Report and the Term Sheet239
  • 7.2.2 Classification of Project Documents242
  • 7.2.3 The Credit Agreement243
  • 7.2.4 Security Documents: Security Interests and What They Do265
  • 7.2.5 Other Finance Documents274
  • 7.2.6 Project Agreements278
  • 7.3 Refinancing Project Finance Deals285
  • Chapter 8: Credit Risk in Project Finance Transactions and the New Basel Capital Accord289
  • Introduction289
  • 8.1 The Basel Committee’s Position on Structured Finance Transactions (Specialized Lending, SL)290
  • 8.1.1 Classes of Transactions Included in Specialized Lending291
  • 8.2 Rating Criteria for Specialized Lending and Their Application to Project Finance292
  • 8.2.1 Financial Strength293
  • 8.2.2 Political and Legal Environment293
  • 8.2.3 Transaction Characteristics294
  • 8.2.4 Strength of Sponsors294
  • 8.2.5 Mitigants and Security Package294
  • 8.2.6 Summary of Grading Criteria294
  • 8.3 Rating Grade Slotting Criteria of the Basel Committee and Rating Agency Practices296
  • 8.4 The Basel Accord: Open Issues297
  • 8.4.1 Effects of the Basel Proposal on the Syndicated Project Finance Loan Market298
  • 8.5 Introduction to the Concepts of Expected Loss, Unexpected Loss, and Value at Risk304
  • 8.6 Defining Default for Project Finance Deals306
  • 8.7 Modeling the Project Cash Flows308
  • 8.7.1 Defining a Risk Assessment Model308
  • 8.7.2 Identifying Project Variables and Key Drivers309
  • 8.7.3 Input Variables: Estimation and Data Collection314
  • 8.7.4 Estimating Project Cash Flow and Valuing Results317
  • 8.8 Estimating Value at Risk through Simulations317
  • 8.9 Defining Project Value in the Event of Default319
  • 8.9.1 Deterministic vs. Stochastic LGD Estimates320
  • 8.9.2 LGD Drivers: The Value of Underlying Assets vs. Defaulted Project Cash Flows321
  • 8.9.3 Restructuring vs. Default321
  • Case Studies323
  • Case Study 1: Cogeneration323
  • C1.1 Situation323
  • C1.2 Production Process324
  • C1.3 Sponsors of the Deal324
  • C1.4 Agreements Underpinning the Deal325
  • C1.5 Financial Structure328
  • C1.6 Conclusion: In Arrigoni’s Office329
  • Case Study 2: Italy Water System331
  • Introduction331
  • C2.1 Business Plan of the Project331
  • C2.2 Assumptions332
  • C2.3 Capital Expenditure334
  • C2.4 Financial Requirement and Sources of Financing334
  • C2.5 Operational Period337
  • C2.6 Economic and Financial Ratios339
  • Appendix to Case Study 2: Structure and Functioning of the Simulation Model341
  • Introduction341
  • A.1 Breakdown of the Financial Model342
  • Case Study 3: Hong Kong Disneyland Project Loan359
  • C3.1 Background on Syndicated Bank Lending360
  • C3.2 The Hong Kong Disneyland Project Loan363
  • C3.3 Designing a Syndication Strategy370
  • C3.4 Executing the Syndication Strategy375
  • C3.5 Conclusion377
  • Glossary and Abbreviations379
  • References395
  • Index401
Book details
  • Vendor Elsevier S & T
  • SKU 9780123736994
  • ISBN-13 9780080553344
  • Author Gatti, Stefano
  • Category Business & Economics
  • Subject Finance

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Project finance is a fast-growing area of capital investment for major infrastructure and other large projects. Financing such projects as EuroDisney, airports, highways, tunnels, schools, hospitals, and other large projects presents a complex and interesting challenge that the specialty of project finance takes on wholeheartedly, combining financial engineering with legal and contractual expertise to develop various financing options. In this book, Stefano Gatti of Bocconi University describes the theory that underpins this cutting-edge industry, and then provides illustrations and examples from actual practice to illustrate that theory. At key points in the book, Gatti brings in other project finance experts who share their specialized knowledge on the legal issues and the role of advisors in project finance deals. The CDROM included with the book allows readers to generate results using an excel spreadsheet.

*Forword by William Megginson, Professor and Rainbolt Chair in Finance, Price College of Business, The University of Oklahoma

*Comprehensive coverage of theory and practice of project finance as it is practiced today in Europe and North America

*CDROM included with the book contains interactive spreadsheets so that readers can input data and run and compare various scenarios, including up to the minute treatment of the cutting-edge areas of PPPs and the new problems raised by Basel II related to credit risk measurement