Project finance

Project finance
Aditya Agarwal
Sandeep Kaul
Fuqua School of Business

Contents
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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

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.

Contents
The MM Proposition
 What is a Project?
 What is Project Finance?
 Project Structure
 Financing choices
 Real World Cases
 Project Finance: Valuation Issues


What is a project?
High operating margins.
 Low to medium return on capital.
 Limited Life.
 Significant free cash flows.
 Few diversification opportunities. Asset specificity. 

What is a project?
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Projects have unique risks:
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Symmetric risks:
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Asymmetric downside risks:
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Demand, price.
Input/supply.
Currency, interest rate, inflation.
Reserve (stock) or throughput (flow).
Environmental.
Creeping expropriation.

Binary risks
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Technology failure.
Direct expropriation.
Counterparty failure
Force majeure
Regulatory risk

What does a Project need?
Customized capital structure/asset specific governance systems to minimize cash flow volatility and maximize firm value.

Contents
The MM Proposition
 What is a Project?
 What is Project Finance?
 Project Structure
 Financing choices
 Real World Cases
 Project Finance: Valuation Issues


What is Project Finance?
Project Finance involves a corporate sponsor investing in and