Project Finance
Applications and Insights to Emerging Markets Infrastructure
- English
- ePUB (mobile friendly)
- Available on iOS & Android
About This Book
Tackle infrastructure development projects in emerging markets with confidence
In Project Finance: Applications and Insights to Emerging Markets Infrastructure, distinguished professor and author Paul Clifford insightfully applies the fundamental principles of project finance structuring to infrastructure investments in emerging markets.
Using leading emerging market case studies to illuminate the underlying themes of the book, the author provides a practitioner's perspective and incisive analysis of concepts crucial to a complete understanding of project finance in emerging markets, including:
¡ Risk management
¡ ESG and impact investing
¡ The emergence of new global multilateral development banks
¡ China's Belt and Road Initiative
Project Finance bridges the gap between theoretical infrastructure development, investment, and finance and the implementation of that theory with instructive and applicable case studies. Throughout, the author relies on a grounded and quantitative approach, combining the principles of corporate finance with straightforward explanations of underlying technologies, frameworks, and national policies.
This book is an invaluable resource for undergraduate and graduate students in finance, as well as professionals who are expected to deal with project and infrastructure finance in emerging markets.
Frequently asked questions
Information
CHAPTER 1
Principles and Application of Project Finance
ORIGINS AND HISTORY OF PROJECT FINANCE
WHY SPONSORS USE PROJECT FINANCE
- Transaction Costs: Project finance deals generally take anywhere from 6 to 12 months to structure, negotiate, and execute the financing. The incremental legal, financial, and other costs associated with execution of the project financing can represent, on average, anywhere from 3% to 5% of total project costs. As such, transaction costs for project finance deals exceed comparable costs for corporate-financed deals.
- Asymmetric Information: Project finance capital providers to a greenfield infrastructure projectâwhich is highly leveraged, thinly capitalized, and typically a single-asset special purpose company with no cash flowsârequire extra due diligence (independent consultants, insurance/legal advisors, and financial modeling), reporting, and controls (cash flow waterfall, financial and non-financial covenants, step-in rights, pledge of security/contracts, etc.). This reduces asymmetric information between lenders and owners/sponsors. The robust due diligence process that project finance lenders undertake also ensures that negative net present value (NPV) projects will not be undertaken as would be the case in corporate deals where project cash flows are co-mingled, fungible, and subject to cross-subsidizing between positive and negative NPV projects.
- Incentive/Agency Conflicts: Project finance helps reduce incentive/agency conflicts due to higher leverage/risk of default and assignment of most of the project cash flows toward servicing debt. This dissuades stakeholders (shareholders, governments, construction companies, operators, etc.) from cash flow diversion actions that would negatively affect the project. The high risk and high leverage typical of project finance deals would normally mean investors and creditors would require higher risk adjusted returns (as measured by the internal rate of return, or IRR) and a higher risk premium on debt, which in turn requires larger project cash flows and heightens the risk of stakeholder interference and adverse actions. The contract structuring and associated risk allocation, which is the essence of project finance, serves to mitigate and reduce risk and therefore reduce required project returns by investors and creditors, which in turn lowers incentive conflict.
- Financial Distress: Project finance reduces or eliminates project sponsor risk contamination as the legally independent special purpose vehicle (SPV) project borrower ensures the project debt is âoff balance sheetâ to the sponsor from an accounting treatment perspective. It is more difficult to achieve full âoff credit riskâ treatment as credit rating agencies typically take the view that the debt and the underlying project is an intrinsic and strategically core part part of the sponsor company's business operations. The sponsor would be viewed as never exercising its non-recourse rights (âwalking awayâ) should the project default. It is one of the main reasons integrated oil and gas majors such as Xon and Chevron typically do not use project financing unless they need to accommodate a financially weaker joint venture partner or are seeking to mitigate country risk. However, it is exactly why a company like US IPP Calpine Corp with 95% debt-to-equity and a sub-investment grade rating was able to successfully raise $5 billion in project finance loans to construct 25 new power generation plants in the early 2000s.
PROJECT FINANCEâASSET CLASS PERFORMANCE
- The 2001 Argentina sovereign debt default and currency devaluation, which negatively affected natural resource (mainly oil and gas) and power projects;
- The 2002 US energy crisis resulting from the bankruptcy of Enron (at the time the largest corporate bankruptcy in US history), which caused the US and European energy markets to decline, resulting in increased project defaults and the demise of the merchant power sector;
- The 2002 dot-com Internet asset bubble collapse, resulting in telecom corporate defaults (WorldCom, Global Crossing, etc.)
Table of contents
- Cover
- Table of Contents
- Title Page
- Copyright
- Dedication
- Preface
- Acknowledgments
- CHAPTER 1: Principles and Application of Project Finance
- CHAPTER 2: Project FinanceâRisk Analysis and Mitigation
- CHAPTER 3: Project Finance Agreements and Loan Documentation
- CHAPTER 4: Risks and Challenges of Project Financing in Emerging Markets
- CHAPTER 5: Sources of Financing for Emerging Markets
- CHAPTER 6: Financial Structuring and Debt Sizing
- CHAPTER 7: Environmental and Social Governance (ESG)
- CHAPTER 8: Emerging Markets, Project Finance Bonds, and Local Capital Markets
- CHAPTER 9: China's Belt and Road Initiative
- CHAPTER 10: Project Finance Market Developments and Finance Structures
- Bibliography
- Index
- End User License Agreement