Agarwal_Kaul

Agarwal_Kaul - Project finance Aditya Agarwal Sandeep Kaul...

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Project finance Aditya Agarwal Sandeep Kaul Fuqua School of Business
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Contents The MM Proposition What is a Project? What is Project Finance? Project Structure Financing choices Real World Cases Project Finance: Valuation Issues The MM Proposition
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The MM Proposition “The Capital Structure is irrelevant as long as the firm’s investment decisions are taken as given” Then why do corporations: Set up independent companies to undertake mega projects and incur substantial transaction costs, e.g. Motorola-Iridium. Finance these companies with over 70% debt inspite of the projects typically having substantial risks and minimal tax shields, e.g. Iridium: very high technology risk and 15% marginal tax rate.
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Contents The MM Proposition What is a Project? What is Project Finance? Project Structure Financing choices Real World Cases Project Finance: Valuation Issues
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What is a project? High operating margins. Low to medium return on capital. Limited Life. Significant free cash flows. Few diversification opportunities. Asset specificity.
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What is a project? Projects have unique risks: Symmetric risks: Demand, price. Input/supply. Currency, interest rate, inflation. Reserve (stock) or throughput (flow). Asymmetric downside risks: Environmental. Creeping expropriation. Binary risks Technology failure. Direct expropriation. Counterparty failure Force majeure Regulatory risk
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What does a Project need? Customized capital structure/asset specific governance systems to minimize cash flow volatility and maximize firm value.
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Contents The MM Proposition What is a Project? What is Project Finance? Project Structure Financing choices Real World Cases Project Finance: Valuation Issues
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What is Project Finance? Project Finance involves a corporate sponsor investing in and owning a single purpose, industrial asset through a legally independent entity financed with non- recourse debt.
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Project Finance – An Overview Outstanding Statistics Over $220bn of capital expenditure using project finance in 2001 $68bn in US capital expenditure Smaller than the $434bn corporate bonds market, $354bn asset backed securities market and $242bn leasing market, but larger than the $38bn IPO and $38bn Venture capital market Some major deals: $4bn Chad-Cameroon pipeline project $6bn Iridium global satellite project $1.4bn aluminum smelter in Mozambique €900m A2 Road project in Poland
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0 50 100 150 200 250 Million USD 1997 1998 1999 2000 2001 Years Total Project Finance Investment Equity Finance MLA/ BLA Bonds Bank loans •Overall 5-Year CAGR of 18% for private sector investment. •Project Lending 5-Year CAGR of 23%.
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This note was uploaded on 09/16/2011 for the course F 112 taught by Professor Ans during the Spring '11 term at IIM Bangalore.

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Agarwal_Kaul - Project finance Aditya Agarwal Sandeep Kaul...

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