MIT1_040s09_lec08

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Unformatted text preview: MIT OpenCourseWare http://ocw.mit.edu 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms. 1.040/1.401 1.040/1.401 Project Management Spring 2009 Project Finance Fred Moavenzadeh Department of Civil and Environmental Engineering Massachusetts Institute of Technology Project Financing Project Main Features Main Economically separable capital investment Economically Cash Flow of the project the main source of the capital recovery Cash Assets of the project is the only source used as collateral Assets No recourse to the assets of sponsoring companies. Unless No specifically required in the contract Debt serving has priority over investors equity Debt During construction, interests on debt is accumulated as part of the During debt. Context: Feasibility Phases Context: Project Concept Project Land Purchase & Sale Review Land Evaluation (scope, size, etc.) Evaluation Constraint survey Constraint Site constraints Site Cost models Cost Siite infrastructural issues S te infrastructural Permit requirements Permit Summary Report Summary Decision to proceed Decision Regulatory process (obtain permits, etc) Regulatory Design Phase Design Finance Finance Investment Firms n Company y uit Equity Project Equity Project Project Finance Eq Company a Lo an Lo ity qu E Company Finance Vs. Project Finance Company Finance Project Finance Capital Formation Will impact debt capacity Will not impact debt capacity, because it is off balance sheet Risk Exposure Could impact overall risk structure or the cost of capital Limited Tax Shield Hard to take advantage of Easier to bundle Cash Flow To corporate treasurer: subject to corporate policy on dividend Directly to the investor Cost of Project Financing None High due to setting up cost Capital Cost Company’s track record High Due to no history Oversight by the Sponsors None Very Demanding Analysis of Financial Performance Performance Strategic Objectives (Long Run) Financial Objectives (Short Run) •Market Share •Growth Rate •Market Leadership •Technology Leadership •Return on Investment (ROI) •Return on Equity (ROE) •Return on Asset (ROA) Project Decision •Does the project make financial sense? •Is the project within the overall strategic framework of the company? •If there is a clash between the objectives, has financial evaluation correctly taken all the costs and benefits into account? Financial Ratios Financial Profitability Ratios Profitability Liquidity Ratios Liquidity Debt Ratios Debt Activity Ratios Activity Leverage Ratios Leverage Summary of Financial Ratios Summary Profitability Ratios Liquidity Ratio Activity Ratios Gross Point Margin An indication of margin available to cover operating expenses and yield profit (Sales – Cost of Goods Sold) /Sales Current Ratio Indicates the extent to which the claims of short term creditors are covered by assets that are expected to be converted to cash in a period roughly corresponding to the maturity of liabilities Current Assets/Current Liabilities Inventory Turnover When compared to industry averages, it provides an indication of whether a company has excessive/inadequate finished good invent. Sales/Inventory of finished goods Operating Profit Margin An indication of firms profitability from current operations without regard to interest changes accounting from capital structure Profit Before Tax and Interest/Sales Quick Ratio (Acid Ratio) A Measure of firms ability to pay off short term obligations without relying on the sale of its inventory (Current Asset-Inventory/Current Liability) Fixed Asset Turnover A Measure of sales productivity and utilization of plant and equipment Sales/Fix Assets Net Profit Margin Shows after tax profit per dollar of sales. Subpart profit margin indicates that the firm sales prices are relatively low or that costs are relatively high or both Profit After Tax/Sales Inventory to Newt Working Capital A measure of the extend to which the firm’s working capital ties up in inventory Inventory/(Current Assets- Current liabilities) Total Assets Turnover A measure of utilization of all firm’s assets ratio below the industry average indicates the company is not generating a sufficient volume of business, given its asset size Sales/Total Asset Return to Total Asset A Measure of total investment in the enterprise. It is sometimes desirable to add interest to alter tax profits to add form the numerator of the ratio since the total assets are financed by creditors as well as by stockholders; hence it is accurate to measure the productivity of assets by the returns provided to both classes of investors Profit After Tax/Total Assets LEVERAGE RATIOS Debt to Asset Ratio Measures the extend to which borrowed funds have been used to finance the firm’s operation Total Debt/Total Equity Account Receivable Turnover A Measure of the average length of time it takes the firm to collect the sale it made on credit Annual Credit Sale/Account Receivable OTHER RATIOS Summary of Financial Ratios Profitability Ratios Liquidity Ratios Activity Ratios Return on Stockholders Equity A measure of the rate of return on stockholders investment in the enterprises Profit After Tax Total Stockholders Equity – Par Value Pref. Stock) Debt Equity Ratio Provides measure of the funds provided by creditors and equity in the firm’s long term capital structure Long Term Debt/Total Shareholders Dividend Yield on Common Stock Measure of returns to owners received in dividends Annual Dividend per share/Current Market Price Return on Common Equity A measure of the rate of return on investment which the owners of the common stock have made in the enterprise (Profit After tax-Preferred Stock dividends) [Tot. Stockholders Equity-par value Pref. Stock] Long Term Debt to Equity Ratio A widely used measure of balance between debt and equity in the firm’s long term capital structure Long Term Debt/Total Shareholders Price Earnings Ratio Faster growing or less-risky firms tend to have higher P/E than slower growing or risky firms Current Market Price/After tax Earning per share Earning Per Share Shows the earnings available to the owners of each share of common stock (Profit After tax-Preferred Stock dividends) Number of Common Stocks Outstanding Time Interest-Earned Ratio Measured the extent to which earnings can decline without the firm becoming unable to meet its annual costs . Profit Before Interest and Taxes/ Total Interest Dividend Payout Ratio Percentage of profits as dividends Annual Dividends share/After tax Earning share Fixed Cost Coverage A more inclusive indication of the firms ability to meet all of its fixed charge obligations Cash Flow Per Share A measure of the discretionary funds over and above expenses that are available for use by the firm After tax Profits + Depreciation Number of Common Shares Outstanding In Construction In Liquidity Ratios: Liquidity Short term obligations: Short Account Payable Account Accrued Interest and Employee Benefits Accrued Advanced billings on contracts Advanced Short Term Assets Short Cash Accounts Receivable Cash Inventory Inventory Contract in Progress Contract Relation Between Contracting Firm, Sponsor and Project Sponsor Contracting Firm Capital Investment & Working Capital + Operating Cost + Project Project Revenue + Sponsor Fund Transfer Traditional Financing Structure Traditional Stockholders/ Investors + Loan Banks and Financial Institutions + Dividend Interest Investment in the Company + + Sponsor + Profit + Project Capital Investment Investors Lenders Equity Project Finance Debt. Contractor EPC Contract Maintenance Contract Toll Payments Road Users Toll Road Project Finance Structure Operator Finance Operation Contract Proj. Company Concession Agreement Contracting Authority Support Agreement Government Investors Equity Contractor Lenders Project Finance Debt. Operator Finance Construction Contract Operation & Maintenance Contract Support Agreement Proj. Company Input Supply Contract Input Supplier Off-take Contract OR Offtaker Simplified Project Finance Structure Concession Agreement or License Government or other public-sector authority Financing – Gross Cashflows Design/Preliminary years OWNER investment operation incomes owner cashflow owner cum cashflow 1 Construction 2 3 4 5 6 7 8 9 10 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $0 ($10,000,000) ($20,000,000) $2,000,000 $4,000,000 $6,000,000 $6,000,000 $0 ($10,000,000) ($30,000,000) ($28,000,000) ($24,000,000) ($18,000,000) ($12,000,000) CONTRACTOR costs ($4,000,000) ($7,000,000) ($14,000,000) revenues $0 $10,000,000 $20,000,000 contractor cashflow ($4,000,000) $3,000,000 $6,000,000 contractor cum cashf ($4,000,000) ($1,000,000) $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $6,000,000 $6,000,000 ($6,000,000) $6,000,000 $6,000,000 $0 $6,000,000 $6,000,000 $6,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 $0 $0 $0 $5,000,000 Owner investment = contractor revenue $10,000,000 $5,000,000 $0 ($5,000,000) ($10,000,000) ($15,000,000) ($20,000,000) ($25,000,000) ($30,000,000) ($35,000,000) 1 2 3 4 5 6 7 8 9 10 11 owner cum cashflow contractor cum cashflow • Early expenditure • Takes time to get revenue Typical Project Structure for IPP Typical Multi-lateral, bi-lateral and Export Credit Agencies Bank Syndicate Sponsor A Non-Recourse DEBT Inter-creditor Agreement Sponsor B Sponsor C EQUITY Shareholder Agreement Board of Directors 70% 30% Labor Project Company (Power Plant) Gas Input Under a supply contract Power Output Under a purchase contract Technol. License Equipment Contract (turbines) Construction Contract (EPC Contract) Adapted from: Esty & Sesia; HBS Oct. 2007 Operating & Maint. Contract Host Government: legal system, permits, Regulation, property rights, etc. Private Owners w/Collateral Facility Distinct Financing Periods Distinct Short-term construction loan Short Bridge Debt Bridge Risky (and hence expensive!) Risky Borrowed so owner can pay for construction (cost) Borrowed Long-term mortgage Long Senior Debt Senior Typically facility is collateral Typically Pays for operations and Construction financing debts Pays Typically much lower interest Typically Loans often negotiated as a package Loans construction w/o tangible operation w/ tangible time Typical Terms Typical Project Company has to complete the project Project under the terms of contract Public Authority provides the land and the rightPublic of-way Ownership remains by the Public Sector Ownership Concession is given for limited period of time Concession Operation and Management is in the hand of Operation Project Company Project Finance and Privatization Project Project finance should be distinguished from privatization, Project which: either conveys the ownership of public-sector assets to the sector private sector-this does not necessarily involve project finance; private this a privatized former state-owned company may raise any privatized owned finance required through a corporate loan. finance or provides for services to be supplied by a private company that had ad previously been supplied by the public sector (e.g., street cleaning) – previously ning) again, this does not necessarily involve project finance: the priivate vate company may not have to incur major new capital expenditure and so not require any finance at all, or may use a corporate loan to raise the not aise finance to make the investment required to provide the service. finance Project finance may come into the picture if a company needs finance for the construction of public infrastructure on the basis of a contract or license, e.g., An Off-take Contract, based on which a project will be constructed to sell its An ell output to a public-sector body (e.g., construction of a power station to sell output sector electricity to a stat-owned power company) electricity A Concession Agreement under which a project will be constructed to Concession provide a service to a public-sector body (e.g., provision of a public-sector sector hospital building and facilities) hospital A Concession Agreement under which a project will be constructed to Concession provide a service to the general public normally provided by the public sector (e.g., a toll road) A Concession Agreement or license under which a project will be constructed Concession to provide new services to the public (e.g., a mobile phone network). Examples of other types of structured finance Examples Receivables financing Receivables Securitization Securitization Leveraged buyout (“LBO”) or management buyout (“MBO”) Leveraged financing Acquisition finance Acquisition Asset finance Asset Leasing Leasing Benefit of Leverage on Investor’s Return Benefit Low Leverage High Leverage Project Cost 1,000 1,000 (a) Debt 300 800 (b) Equity 700 200 (c) Revenue from project 100 100 (d) Interest rate on debt (p.a.) 5% 7% (e) Interest payable [(a)x(d)] 15 56 (f) Profit [(c) – (e)] 85 44 Return on equity [(f)÷(b)] 12% 22% Contractor Financing Payment schedule Payment Break out payments into components Break Advance payment Advance Periodic/monthly progress payment (itemized breakdown structure) Periodic/monthly Milestone payments Milestone Often some compromise between contractor and owner Often Architect certifies progress Architect Agreed-upon payments retention on payments (usually, about 10%) retention Often must cover deficit during construction Often Can be many months before payment received Can S-curve Work Man-hours months S-curve Cost 100 8 90 7 80 6 $K 5 60 50 4 40 3 30 2 20 1 10 0 0 1 2 3 4 5 67 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Working days Cumulative costs $K 70 Monthly cost Cum. costs Expense & Payment Expense Amount (dollars) Contractor's expenses Owner's payments 0 1 23 4 5678 Time period (month) 9 Cumulative net cash flow (dollars) (A) Expenses and payments + 01 2 3 4 5 67 8 9 Time period (month) _ (B) Cumulative net cash flow of contractor Image by MIT OpenCourseWare. Contractor Financing Contractor Owner keeps an eye out for Owner Front-end loaded bids (discounting) Front Unbalanced bids Unbalanced Contractor Revenue Projection Contractor Revenue Projection 120 140 100 120 100 Revenue Revenue 80 60 80 60 40 40 20 20 0 0 1 2 3 4 5 6 7 8 9 10 Month 11 12 13 14 15 16 17 18 1 2 3 4 5 6 7 8 9 10 Month 11 12 13 14 15 16 17 18 Contractor Financing Contractor Owner keeps an eye out for Owner Front-end loaded bids (discounting) Front Unbalanced bids Unbalanced Contractors frequently borrow from Contractors Banks (Need to demonstrate low risk) Banks Interaction with owners Interaction Some owners may assist in funding Some Help secure lower-priced loan for contractor Help Sometimes assist owners in funding! Sometimes Big construction company, small municipality Big BOT BOT Contractor Financing Agreed upon in contract Agreed Often structure proposed by owner Often Should be checked by owner (fair-cost estimate) Should Often based on “Masterformat” Cost Breakdown Structure Often (Owner standard CBS) Certified by third party (Architect/engineer) Certified Latent Credit Latent Many people forced to serve as lenders to owner due Many to delays in payments Designers Designers Contractors Contractors Consultants Consultants CM CM Suppliers Suppliers Implications Implications Good in the short-term Good Major concern on long run effects Major Role of Taxes Role Tax deductions for Tax Depreciation Depreciation the process of recognizing the using up of an asset through the wear and obsolescence and of subtracting capital expenses from the revenues that the asset generates over time in computing taxable income Others Others Develop or Not Develop Develop Is any individual project worthwhile? Is Given a list of feasible projects, which one is the best? Given How does each project rank compared to the others on How the list? Project Evaluation Example: Project Project A Project Project B Project Construction=3 years Construction=3 Construction=6 years Construction=6 Cost = $1M/year Cost Cost=$1M/year Cost=$1M/year Sale Value=$4M Sale Sale Value=$8.5M Sale Total Cost? Total Total Cost? Total Profit? Profit? Profit? Profit? ...
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This note was uploaded on 11/29/2011 for the course CIVIL 1.018j taught by Professor Markusbuehler during the Fall '08 term at MIT.

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