Global Project Financing

Contents

AIM OF THE COURSE

Structure does affect value! Project Finance provides an alternative to Corporate Financing and creates an important realistic laboratory to study capital structure, risk management, valuation, contracting, and corporate governance. The complex cases provide a bridge from Corporate Financial Theory to actual projects and financial practice.

MAIN ISSUES:

During the ongoing process of globalization many countries, both developed and emerging, are creating opportunities for the development of extremely large projects. These projects are in excess of $500 million US dollars and are very difficult to design, build and operate successfully. In order to mitigate the risks involved with these mega-projects, companies and governments both are interested in creating stand-alone entities that are successful or fail on their own merits, leaving the initiating organizations un-affected.

These projects create unique opportunities to study the effects of many of the underlying questions discussed in corporate finance. For example, the separation of the financing and investment decision, alternative governance systems, the discipline created by high leverage commitments and how to structure risk mitigation strategies.

The cases provide vehicles to address many unresolved issues in Corporate Finance. In the area of cost of capital, two troublesome situations are explored. How does a firm compute the cost of capital for a project in an emerging economy? The other, how to value a project when there is not a target capital structure throughout the life of the project.

Another difficult issue is the process of risk mitigation for a one-project entity. What affect does the lack of diversification benefits have on the firm’s valuation? How can risk be best allocated among the stakeholders’ of the project?
In these large projects risk must be addressed in the construction, start-up and operating phases of the project. Which stakeholders’ can bear these risks at the lowest cost?

High leverage is common in Project Finance. Debt maturities are seldom longer the fifteen years. Thus, debt repayments must be sculptured to the forecast of the project’s cash flows. This results in the sophisticated use of senior and mezzanine financing vehicles which requires insightful financial modelling.

• Large-Scale Investments
• One project firms
• Developed vs. Emerging countries
• Organizational Structure
• Contractual Structure
• Governance Structure
• Cash waterfalls
• Does diversification add value?
• Foreign project cost of capital
• Changing capital structure
• Debt Structuring with high leverage
• Stakeholder risk mitigation

TEACHING METHODOLOGIES:

The lectures will focus on various Project Financing structures and the risks involved with these projects around the world. The course will emphasize complex real world cases that illustrate both the successful and failed projects in both developed and emerging countries. Being a case driven course places responsibility on the class participants to do a substantial amount of preparation and reading before the class period. Cases will be done in small groups to emphasize peer discussion. Cases will be used as the vehicles for lecture and discussion. Group work will consist of meeting and discussing cases, collecting data, compiling data, and making quantitative analyses. Individuals will be responsible for oral presentations, and specific case questions.

EVALUATION OF LEARNING OUTCOME: ASSESSMENT CRITERIA

By the end of the course students must be able to fulfill the above stated learning outcome.
Grade 12:
Grade 12 denote 100% target fulfillment related to the learning outcome.
Grade 02:
Grade 02 is the minimum grade required for passing and is therefore given for the minimum acceptable performance related to the learning outcome.

LITERATURE:

1. Project Financing: Asset-Based Financial Engineering, by John D. Finnerty, 2nd Ed., ISBN 978-0-470-08624-7 Buy second edition if possible) (JDF)
2. Modern Project Finance: A Casebook, by Benjamin C. Esty, ISBN: 0-471-43425-6 (BCE)
Readings: A list of up-to-date reading will be provided from two major sources.
1. The World Bank
2. The Journal of Structured Finance