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Benjamin C Esty - One of the best experts on this subject based on the ideXlab platform.
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an overview of Project Finance and infrastructure Finance 2009 update
Social Science Research Network, 2007Co-Authors: Benjamin C Esty, Aldo SesiaAbstract:Provides an introduction to the fields of Project Finance and infrastructure Finance, and gives a statistical overview of Project-Financed investments over the years from 2005 to 2009. Examples of Project-Financed investments include the $1.4 billion Mozal aluminum smelter in Mozambique, $4 billion Chad-Cameroon pipeline, $6 billion Iridium global satellite telecommunications system, 900 million A2 Toll Road in Poland, $20 billion Sakhalin II gas field in Russia, and the $28 billion Dabhol power Project. Globally, firms Financed $240 billion of capital expenditures using Project Finance in 2009, down from $409 billion in 2008 as the financial crisis hit the Western markets. The use of Project Finance has grown at a compound rate of 0% over the last five years, 4% over the past 10 years, and 12% over the past 15 years. This note focuses primarily on private sector investment in industrial and infrastructure Projects, and contains four sections. The first section defines Project Finance and contrasts it with other well-known financing mechanisms. The second section describes the evolution of Project Finance from its beginnings in the natural resources industry in the 1970s, to the U.S. power industry in the 1980s, to a much wider range of industry applications and geographic locations in the 1990s, and most recently to infrastructure Finance in the 2000s. The third section provides a statistical overview of Project-Financed investment over the last five years (2005 to 2009), and looks at industry, Project, and participant specific data. The third section also provides recent data on infrastructure investments and public-private partnerships. The final section discusses current and likely future trends.
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an overview of Project Finance 2004 update
Social Science Research Network, 2005Co-Authors: Benjamin C Esty, Aldo SesiaAbstract:SUBJECT AREAS: Project Finance, capital investment This note provides an introduction to the field of Project Finance and a statistical overview of Project-Financed investments over the last five years. Examples of Project-Financed investments include the $4 billion Chad-Cameroon pipeline, $6 billion Iridium global satellite telecommunications system, Euro 900 million A2 Toll Road in Poland, and the $1.4 billion Mozal aluminum smelter in Mozambique. Globally, firms Financed $234 billion of capital expenditures using Project Finance in 2004, up from $172 billion in 2003. Despite a few setbacks (e.g., in 1998 due to the Asian crisis and in 2002 due to crises in the U.S. power and telecommunications industries), the use of Project Finance has grown at a compound rate of almost 20% over the past 10 years. The note begins by defining Project Finance and contrasting it with other well-known financing mechanisms such as asset-back securities and secured debt. The next section describes the evolution of Project Finance from its origins in the natural resources industry in the 1970s to the U.S. power industry in the 1980s and to a much wider range of industrial applications and geographic settings in the 1990s and 2000s. The third section provides a statistical overview of the Project-Financed investment over the last five years (2000-2004). It covers a variety of institutional details at the industry, Project, and participant level. For example, it presents data on the average size of Projects ($400 million) and their capitalization (69% debt-to-total capital) as well as league tables for Project loans, Project bonds, and advisory work. The final section discusses current and likely future trends. This note can be used by itself to explain Project Finance or in conjunction with specific cases on Project Finance.
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why study large Projects an introduction to research on Project Finance
European Financial Management, 2004Co-Authors: Benjamin C EstyAbstract:Despite the fact that more than $200 billion of capital investment was Financed through Project companies in 2001, an amount that grew at a compound annual rate of almost 20% during the 1990s, there has been very little academic research on Project Finance. The purpose of this article is to explain why Project Finance in general and why large Projects in particular merit separate academic research and instruction. In short, there are significant opportunities to study the relationship among structural attributes (i.e., high leverage, contractual details, and concentrated equity ownership), managerial incentives, and asset values, as well as improve current practice in this rapidly growing field of Finance.
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teaching Project Finance an overview of the large scale investment course at harvard business school
2003Co-Authors: Benjamin C EstyAbstract:SUBJECT AREAS: Project Finance, course overview, corporate Finance, teaching Large-Scale Investment (LSI) is a case-based course about Project Finance that is designed for second-year MBA students. Project Finance involves the creation of a legally independent Project company Financed with nonrecourse debt for the purpose of investing in a single purpose industrial asset. In 2001, firms Financed almost $220 billion worth of capital expenditures through Project companies, an amount that has grown and will continue to grow rapidly in the years ahead. As the name implies, the course focuses primarily on large Projects those costing $500 million or more because they provide a clear window on how managers make important structural decisions and how those decisions, in turn, affect firm value and performance. At the same time, large Projects often encounter financial distress witness EuroTunnel, EuroDisney, Dabhol, and Iridium, yet are critical to economic growth and prosperity in both developed and developing markets. The central theme of the course is that structure matters, which stands in sharp contrast to the neoclassical view of the firm as a black box production function and the assumption underlying Modigliani and Miller's first irrelevance proposition that financing and investment are separable and independent activities. Through this course, students learn how structure affects managerial incentives to create value and manage risk. Ultimately, students learn how to increase value through both investment and financing choices. Project companies provide a particularly powerful laboratory in which to study the determinants and implications of various structural attributes because they are, as newly created companies, less influenced by the vagaries of history. Moreover, the size of the investments (75% of Projects cost more than $100 million) and the time it takes to structure them (one to five years) ensures that managers have the opportunity and the economic incentive to make careful, value enhancing structural decisions. Finally, as standalone entities, it is easier to observe the structural choices and outcomes. The intellectual challenge for students is to understand how financial structure affects managerial incentives and Project value. A thorough understanding of these relationships, however, requires advanced Finance theories. For this reason, the course introduces more advanced theories of capital structure, corporate governance, and risk management as well as more advanced valuation and credit assessment tools. This note describes the course's key themes, structure, and content. It is designed for educators interested in teaching a course on Project Finance. Although several business schools now have Project Finance courses (Columbia, HBS, Kellogg, LBS, NYU, etc.), the field is still relatively new and much of the pedagogical material has only recently become available. Instead of creating a new Project Finance course, the material described in this note can also be used to create a module in an existing course on corporate Finance, international Finance, or financial institutions. Alternatively, it can be used to create courses on emerging market corporate Finance, risk management, and energy Finance. In summary, the material is quite flexible and has broad applications across many academic disciplines. Given the pedagogical nature of this note, it is only available to academic instructors.
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modern Project Finance a casebook
2003Co-Authors: Benjamin C EstyAbstract:Acknowledgments. About the Author. 1. Introduction to Modern Project Finance. 2. An Overview of Project Finance. 3. Why Study Large Projects? MODULE 1. STRUCTURE ProjectS. 4. The Chad Cameroon Petroleum Development and Pipeline Project (A). 5. Australia Japan Cable: Structuring the Project Company. 6. Calpine Corporation: The Evolution from Project to Corporate Finance. 7. BP Amoco (A): Policy Statement on the Use of Project Finance. 8. BP Amoco (B): Financing Development of the Caspian Oil Fields. MODULE 2. VALUING ProjectS. 9. Airbus A3XX: Developing the World s Largest Commercial Jet (A). 10. Nghe An Tate & Lyle Sugar Company (Vietnam). 11. An Economic Framework for Assessing Development Impact. 12. Texas High Speed Rail Corporation. 13. Contractual Innovation in the UK Energy Markets: Enron Europe, The Eastern Group, and the Sutton Bridge Project . 14. Bidding for Antamina MODULE 3: MANAGING RISKY ProjectS. 15. Petrolera Zuata, Petrozuata C.A. 16. Poland s A2 Motorway. 17. Restructuring Bulong s Project Debt. 18. Mobile Energy Services Company. 19. Financing the Mozal Project. MODULE 4. FINANCING ProjectS. 20. Chase s Strategy for Syndicating the Hong Kong Disneyland Loan (A). 21. The International Investor: Islamic Finance and the Equate Project . 22. Introduction to Islamic Finance (note). 23. Financing PPL Corporation s Growth Strategy. 24. Basel II: Assessing the Default and Loss Characteristics of Project Finance Loans. 25. Iridium LLC. REFERENCE MATERIAL. Project Finance Research, Data, and Information Sources. Project Finance Glossary. Index.
Stefanie Kleimeier - One of the best experts on this subject based on the ideXlab platform.
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arranger certification in Project Finance
Financial Management, 2013Co-Authors: Stefano Gatti, Stefanie Kleimeier, William L Megginson, Alessandro SteffanoniAbstract:Using a sample of 4,122 Project Finance loans worth $769 billion arranged from 1991 to 2005, we demonstrate that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers. Banks participating in these loan syndicates, rather than the Project sponsors, pay for this certification. They do so by allowing top tier arrangers to keep larger fractions of the upfront arranging fees. Results are robust to the correction for the endogenous choice of loans by prestigious arrangers and indicate that certification is even more valuable during periods of extreme financial stress.
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political risk Project Finance and the participation of development banks in syndicated lending
Journal of Financial Intermediation, 2012Co-Authors: Christa Hainz, Stefanie KleimeierAbstract:How should loan contracts for financing Projects in countries with high political risk be designed? We argue that non-recourse Project Finance loans and the participation of development banks in the loan syndicate help mitigate political risk. We test these arguments by conducting a study with a sample of 4978 loans made to borrowers in 64 countries. Our results show that if political risk is higher, then Project Finance loans are more likely to be used, and development banks are more likely to participate in the syndicate. We also show that the terms of the loan contract depend not only on the political risk but also on the legal and institutional environment as well.
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Project Finance as a driver of economic growth in low income countries
Research Papers in Economics, 2009Co-Authors: Stefanie Kleimeier, Roald J VersteegAbstract:This study investigates the role of Project Finance as a driver of economic growth. We hypothesize that Project Finance is beneficial to the least developed economies as it compensates for any lack of domestic financial development. The contractual structure unique to Project Finance should lead to better investment management and governance. Investigating 90 countries from 1991 to 2005, we find support for our hypothesis. Project Finance indeed fosters economic growth and this effect is strongest in low-income countries, where financial development and governance is weak.
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Project Finance as a driver of economic growth in low income countries
Review of Financial Economics, 2009Co-Authors: Stefanie Kleimeier, Roald J VersteegAbstract:This study investigates the role of Project Finance as a driver of economic growth. We hypothesize that Project Finance is beneficial to the least developed economies as it is able to compensate for a lack of domestic financial development. The contractual structure unique to Project Finance leads to better investment management and governance. Investigating 90 countries from 1991 to 2005, we find support for our hypothesis. Results show that Project Finance fosters economic growth and that its effect is strongest in low-income countries, where financial development and governance is weakest.
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arranger certification in Project Finance
2008Co-Authors: Stefano Gatti, Stefanie Kleimeier, William L Megginson, Alessandro SteffanoniAbstract:We examine certification by lead arrangers of Project Finance (PF) syndicated loans, because PF vehicle companies are stand-alone entities, created for a single purpose, with all valuation impacts contained in the Project financing package. Using a sample of 4,122 Project Finance loans, worth $769 billion, arranged between 1991 and 2005, we show that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers. Banks participating in these loan syndicates, rather than the Project sponsors, are the parties that pay for certification, and do so by allowing top-tier arrangers to keep larger fractions of the up-front arranging fees, though overall fees are reduced when a prestigious bank arranges a loan. Our results are robust to correcting for endogenous choice of loans by prestigious arrangers, and we show that certification is most valuable during periods of extreme financial stress.
William L Megginson - One of the best experts on this subject based on the ideXlab platform.
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arranger certification in Project Finance
Financial Management, 2013Co-Authors: Stefano Gatti, Stefanie Kleimeier, William L Megginson, Alessandro SteffanoniAbstract:Using a sample of 4,122 Project Finance loans worth $769 billion arranged from 1991 to 2005, we demonstrate that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers. Banks participating in these loan syndicates, rather than the Project sponsors, pay for this certification. They do so by allowing top tier arrangers to keep larger fractions of the upfront arranging fees. Results are robust to the correction for the endogenous choice of loans by prestigious arrangers and indicate that certification is even more valuable during periods of extreme financial stress.
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arranger certification in Project Finance
2008Co-Authors: Stefano Gatti, Stefanie Kleimeier, William L Megginson, Alessandro SteffanoniAbstract:We examine certification by lead arrangers of Project Finance (PF) syndicated loans, because PF vehicle companies are stand-alone entities, created for a single purpose, with all valuation impacts contained in the Project financing package. Using a sample of 4,122 Project Finance loans, worth $769 billion, arranged between 1991 and 2005, we show that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers. Banks participating in these loan syndicates, rather than the Project sponsors, are the parties that pay for certification, and do so by allowing top-tier arrangers to keep larger fractions of the up-front arranging fees, though overall fees are reduced when a prestigious bank arranges a loan. Our results are robust to correcting for endogenous choice of loans by prestigious arrangers, and we show that certification is most valuable during periods of extreme financial stress.
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legal risk as a determinant of syndicate structure in the Project Finance loan market
Social Science Research Network, 2002Co-Authors: Benjamin C Esty, William L MegginsonAbstract:This paper examines how legal risk, defined as the strength of creditor rights and legal enforcement, affects debt ownership concentration in the Project Finance loan market. Using a sample of 495 Project Finance loan tranches from 61 countries, worth $151 billion, we document high levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical Project Finance loan tranche. We also show that weak creditor rights and poor legal enforcement are associated with more diffuse ownership structures, which leads us to conclude that international Project Finance lenders structure syndicates to deter strategic default rather than to enhance monitoring incentives or facilitate low-cost re-contracting in the event of default. On a more theoretical level, the results illustrate the continuous nature of debt ownership and refute the overly simplistic distinction between single bank creditors and atomistic public bondholders commonly described in the literature. Key words: bank lending, Project Finance, syndication, international corporate governance, creditor rights, legal rules and enforcement
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legal risk as a determinant of syndicate structure in the Project Finance loan market
Research Papers in Economics, 2002Co-Authors: Benjamin C Esty, William L MegginsonAbstract:This paper examines how legal risk, defined as the strength of creditor rights and legal enforcement, affects debt ownership concentration in the Project Finance loan market. Using a sample of 495 Project Finance loan tranches from 61 countries, worth $151 billion, we document high levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical Project Finance loan tranche. We also show that weak creditor rights and poor legal enforcement are associated with more diffuse ownership structures, which leads us to conclude that international Project Finance lenders structure syndicates to deter strategic default rather than to enhance monitoring incentives or facilitate low-cost re-contracting in the event of default. On a more theoretical level, the results illustrate the continuous nature of debt ownership and refute the overly simplistic distinction between single bank creditors and atomistic public bondholders commonly described in the literature.
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an empirical analysis of limited recourse Project Finance
Meteor Research Memorandum, 2002Co-Authors: Stefanie Kleimeier, William L MegginsonAbstract:Our study extends on conventional measures of contagion by directly investigating changes in the existence and the directions of causality. In particular, we apply a Granger-causality methodology on sovereign bond spreads as a measure of perceived country risk. For the Asian crisis, we find evidence for new and changed causality patterns on a regional level. With the arrival of the Russian crisis, causality patterns were changing not only on a regional but also on a global level.
Stefano Gatti - One of the best experts on this subject based on the ideXlab platform.
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arranger certification in Project Finance
Financial Management, 2013Co-Authors: Stefano Gatti, Stefanie Kleimeier, William L Megginson, Alessandro SteffanoniAbstract:Using a sample of 4,122 Project Finance loans worth $769 billion arranged from 1991 to 2005, we demonstrate that certification by prestigious lead arranging banks creates economic value by reducing overall loan spreads compared to loans arranged by less prestigious arrangers. Banks participating in these loan syndicates, rather than the Project sponsors, pay for this certification. They do so by allowing top tier arrangers to keep larger fractions of the upfront arranging fees. Results are robust to the correction for the endogenous choice of loans by prestigious arrangers and indicate that certification is even more valuable during periods of extreme financial stress.
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Project Finance collateralised debt obligations an empirical analysis of spread determinants
European Financial Management, 2012Co-Authors: Valerio Buscaino, Stefano Caselli, Francesco Corielli, Stefano GattiAbstract:Credit rating is the most important variable in determining tranche spread at issue on collateralised debt obligations (CDOs) issues backed by Project Finance (PF) loans. Factors that are important for pricing in the case of corporate bonds, such as market liquidity and weighted average maturity, are also relevant for determining spreads for these securities. Furthermore, the nature of the underlying assets has a substantial impact on CDO pricing: Primary market spread is significantly higher when the underlying PF loans bear a higher level of market risk and when the proportion of Projects still under construction in the securitised portfolio is larger.
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risk shifting through nonfinancial contracts effects on loan spreads and capital structure of Project Finance deals
Journal of Money Credit and Banking, 2010Co-Authors: Francesco Corielli, Stefano Gatti, Alessandro SteffanoniAbstract:We study capital structure negotiation and cost of debt financing between sponsors and lenders using a sample of more than 1,000 Project Finance loans worth around US$195 billion closed between 1998 and 2003. We find that lenders: (i) rely on the network of nonfinancial contracts as a mechanism to control agency costs and Project risks, (ii) are reluctant to price credit more cheaply if sponsors are involved as Project counterparties in the relevant contracts, and finally (iii) do not appreciate sponsor involvement as a contractual counterparty of the special purpose vehicle when determining the level of leverage.
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what drives value creation in investment Projects an application of sensitivity analysis to Project Finance transactions
European Journal of Operational Research, 2010Co-Authors: Emanuele Borgonovo, Stefano Gatti, Lorenzo PeccatiAbstract:Evaluating the economic attractiveness of large Projects often requires the development of large and complex financial models. Model complexity can prevent management from obtaining crucial information, with the risk of a suboptimal exploitation of the modelling efforts. We propose a methodology based on the so-called "differential importance measure (D)" to enhance the managerial insights obtained from financial models. We illustrate our methodology by applying it to a Project Finance case study. We show that the additivity property of D grants analysts and managers full flexibility in combining parameters into any group and at the desired aggregation level. We analyze investment criteria related to both the investors's and lenders' perspectives. Results indicate that exogenous factors affect investors (sponsors and lenders) in different ways, whether exogenous variables are considered individually or by groups.
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offtaking agreements and how they impact the cost of funding for Project Finance deals a clinical case study of the quezon power ltd co
Review of Financial Economics, 2010Co-Authors: Veronica Bonetti, Stefano Caselli, Stefano GattiAbstract:Abstract Offtaking agreements are an important risk transfer mechanism in Project Finance. However, they can also be thought of as a trade-off between lower market and higher counterparty risks. We use the case of the Quezon Power Ltd Co. to test the effect of higher counterparty risk on the cost of funding. Results indicate that the spread of Quezon's bond and counterparty risk are positively correlated when risk is represented by the daily volatility of the offtaker's stock returns. We also find an inverse relation between the rating upgrades of the offtaker and the spread paid by Quezon Power.
Kate Barth - One of the best experts on this subject based on the ideXlab platform.
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getting the world bank out of development s way the case for a Project Finance exception to the world bank negative pledge clause
Social Science Research Network, 2013Co-Authors: Kate BarthAbstract:During tumultuous fiscal years of the past few decades, the World Bank, acting in its capacity as lender of last resort, granted unsecured loans to debt-ridden sovereigns. Instead of taking a lien over the state's assets, the World Bank protected its interests via a broadly-worded Negative Pledge Clause. This clause ensures that any lien created on any public assets as security for external debt which results in a priority for a third-party creditor equally and ratably secures all amounts payable by the borrowing state. In short, should such a lien be granted, the World Bank shares in the amounts paid out to the third party creditor, thus preventing the creditor from enjoying senior creditor status and undermining the value of any later-granted lien. Including the Negative Pledge Clause in the World Bank loan agreements helps mitigate the World Bank's risk of providing unsecured loans by ensuring that a developing nation will not give a later creditor priority over its assets. In theory, such a pledge protects both the World Bank, as a creditor, and the sovereign nation, as debtor. However, the barrier that the Negative Pledge Clause constructs around a state's ability to engage with other creditors is so formidable that the clause ends up preventing the state from attracting commercial investment for Project financings. As currently drafted, the Negative Pledge Clause dissuades commercial lenders from investing in exactly the kinds of Projects that might further development and enrich a nation (thus strengthening the nation's ability to pay back its debts). This is not only unfortunate for the developing countries involved, but also challenge the raison d'etre of the World Bank, a multilateral institution designed to promote development. This article proposes reforming the Negative Pledge Clause by clarifying the language of the text and the consequences of a breach in the way which narrows the breadth of the clause. This article also argues that the World Bank would better achieve its overall purpose of promoting development by including a Project Finance exception to the Negative Pledge Clause to attract investors to Projects that help expand national infrastructure.
