Financing project is arranging the funds required for a project. The end of the financing stage is marked by financial closure which is a milestone in concession contracts. The concessionaire has to arrange the funds required for the construction of the project through equity or debt. In the earlier modules we saw that project finance is the most preferred mode of financing in infrastructure projects.
Debt is the most preferred finance option in the project finance. There is normally a gearing ratio (debt equity ratio) of 3:1 in infrastructure projects. Debt financing is obtained from banks through syndication. In syndication, multiple banks come together to finance the project to share the profits and risks. Also, syndication allows for diversification in loan portfolios so that even if one project fails, the effect is less on the bank. In syndication we saw the role of the lead arranger, Co-arranger, lead manager, co-manager and participant. We discussed this through case study on syndicating the Hong Kong Disneyland loan.
When the concessionaire is able to arrange the equity and debt for construction of the project, financial closure is complete. We discussed financial closure in detail in class through the Bangaluru International Airport case study. In the case study, we saw the opportunistic behaviour of active equity holders and wait for a major announcement in 2015 from Siemens as the lock in period is coming to an end.
When construction is complete through the money obtained from syndication loan and the when the project enters the operation stage, the concessionaire prefers to refinance the syndicated loan with public bonds. Public bonds have less interest rate compared to syndicate loans and hence are preferred by concessionaire. However, public bonds are not used during the construction stage because of interest arbitrage.
Two cases were discussed in this module. The first involved strategy by Chase Manhattan Bank to syndicate loans for Hong Kong Disneyland loan project and the other involved Financial closure of Bengaluru International Airport.
In the first case, we learnt about the roles played by the lead arranger and underwriter, by the co-arrangers, lead manager, co-manager and participants. Chase had to select between being a sole lead arranger without any sub-underwriters or as a sole arranger having sub-underwriting to share the risk of underwriting. Though the preliminary survey of potential lenders indicated that the debt issue would be oversubscribed, it would be a better strategy for Chase to take on board sub-underwriters. Although this strategy might reduce the fees accruing to Chase, it will protect Chase from taking the entire loan on its balance sheet in the unlikely event of it not being able to arrange lenders for the entire HK$ 3.3 billion. This also ensured goodwill with other competing arranger banks who would look for Chase as a partner for large deals sourced by them in future. In this case, we also saw how Chase as a sole arranger reaped a lion’s share of the fees.
In the Bengaluru Airport case, we saw that the sponsors who took the initial risk – such as L&T, Siemens and Unique Zurich- reaped phenomenal returns. L&T also, having secured the construction contract as part of the deal, became the only EPC contractor with modern airport construction capability. This helped L&T to secure EPC jobs from the subsequent privatized airports like Hyderabad, Delhi and Mumbai as well. We also saw that ICICI was the sole arranger and lender for this project. As the project debt was quite small from ICICI’s point of view, they could fund the entire amount. Also, they did not want to encourage competition in the field of airport financing!
The Hong Kong Disneyland case study shows the importance and the role played by the underwriters whose job is to ensure smooth syndication. In this case the project company could not deal with all 25 banks on one to one basis. Hence the underwriters formed an interface between the Project Company and the Lenders.
The expectations of project company from the underwriter are:- • To raise capital • To ensure faster delivery of funds • To make sure that the banks are flexible.
The expectations of lenders from underwriters are: • To act as a guarantee that the project is credit worthy • To have a certain level of commitment levels (so upfront underwriting fee is charged)
In this module, we also discussed the risk profile of projects – the risk associated with the project decreases with increase in privatisation (BOT < BOOT < BOO). Generally, projects with high public good characteristics are implemented on BOT structure. Highest degree of competition is usually faced by the BOO structured projects (like the telecommunications).
Bangalore International Airport Case study involves two types of investors – passive (Public entities – AAI, KSIIDC) and active investors (Private – Siemens, L & T, UZ). Project structuring is helpful in such cases to make sure that the project is implemented without any trouble, make the revenues attractive and to ensure that high privatisation is not conveyed. GVK showed high interest in the Bangalore Airport as it was the first airport to be privatised and the concession was low – 4% of the total revenues – it was a good opportunity to earn high reputation in the airport sector.
CE11B073: The case on Chase's strategy was the first case that provided an insight into the lenders side of financing an infrastructure project. This case also exposed us to an interesting bid-to-lose strategy, where the bank had to bid high enough to appear to want to win but not high enough to actually win. This manoeuvre was performed to retain loyalty with Disney and to appear as if they are interested in such large projects which demand long maturity periods. In this case, we saw that Chase, being the lead arranger received much higher returns for its investments than the other banks because it was their responsibility to manage the syndication and because they had committed to underwrite the full amount (and not just put their best efforts). In the BIAL project, it seemed as if the private sponsors were raring to sell their equity and leave the project. They were able to do so and obtain high revenues in the process. One would wonder why this is so because if they were able to sell the equity for such high prices, then there is surely more money to be made by retaining the project. But the expertise of companies like L & T and Siemens lie in construction and not operation of airports. Once constructed, it is more profitable for them to sell their equity and move on to the next construction project. Mr. T. S. Venkatesh during his lecture mentioned that L&T does not maintain any emotional attachment to the projects it does. The behaviour of the private sponsors is in contrast with that of ICICI bank which did not syndicate the loan so that it could retain its position as the only bank which has financed a private airport project in India.
CE11B070 B. Pavan Kumar The fourth module started with the concept of syndication of a loan transaction. Basically, loan can be taken in two types, from a sole lender or a syndicated loan. Syndication is the process where an arranger gets the duty of accumulating money from a set of other banks. Also, the concept of sub-ordinated debt was studied. Sub-ordinated debt is the loan with slightly higher interest rate but is repaid only after the main debt is cleared. Hong kong Disney land loan case study was studied in which how chase has won the bid for arranging loans was discussed and the strategies proposed by the chase for syndication are evaluated. Financial project modelling was then studied. The calculations of NPV and IRR is seen, with the emphasis on how bad things go when projections are wrongly made. Financial closure of BIAL case is discussed in the third session of this module. The extremely high rate of returns obtained by the all 3 companies when they exited and sold their stakes the project was interesting to observe as they being the companies that raised the debt had exited before repaying the loans. L&T now has got better opportunities in the field of Airports. Here, it is more profitable for them to sell their equity and move on to the next construction project as they were construction companies and not operation companies. The process of financial closure is seen in this case.
CE11B070 B. Pavan Kumar The fourth module started with the concept of syndication of a loan transaction. Basically, loan can be taken in two types, from a sole lender or a syndicated loan. Syndication is the process where an arranger gets the duty of accumulating money from a set of other banks. Also, the concept of sub-ordinated debt was studied. Sub-ordinated debt is the loan with slightly higher interest rate but is repaid only after the main debt is cleared. Hong kong Disney land loan case study was studied in which how chase has won the bid for arranging loans was discussed and the strategies proposed by the chase for syndication are evaluated. Financial project modelling was then studied. The calculations of NPV and IRR is seen, with the emphasis on how bad things go when projections are wrongly made. Financial closure of BIAL case is discussed in the third session of this module. The extremely high rate of returns obtained by the all 3 companies when they exited and sold their stakes the project was interesting to observe as they being the companies that raised the debt had exited before repaying the loans. L&T now has got better opportunities in the field of Airports. Here, it is more profitable for them to sell their equity and move on to the next construction project as they were construction companies and not operation companies. The process of financial closure is seen in this case.
There are different options available to choose how funds are to be arranged for a project. They are debt, equity and sub-ordinated debt. We have seen the advantages of opting out for sub-ordinated debt and the negative equity concept which is basically insolvency of the company. There are several sources from which these funds can be mobilized. Some of them are international financial institutions, multilateral financing agencies and export credit agencies. Coming to the Chase’s strategy for syndicating Hong Kong Disneyland loan, Chase team came up with 3 possible ways of syndicating the loan of $3.3billion required all of which are fully underwritten. 1. Chase is the mandated lead arranger bringing $660million and 4 banks will take up the responsibility of sub-underwriters bringing in $660million each. This would potentially reduce the risk of bringing $3.3billion to $660milion. This type of syndication has lesser risk on Chase bank because the risk is absorbed by the borrower that if the market doesn’t accept the deal he should pay higher fees to entice greater participation. (High fee + Less risk) 2. Chase can be a sole mandated lead arranger without any sub-underwriting arranging the whole $3.3billion by itself. Although this would gain them the sub-underwriting fee it would expose them to higher risk of $3.3billion compared to $66.million. (High fee+ high risk) 3. Chase and 2 other banks would be the mandated lead arrangers with no sub-underwriters bringing $1.1billion each. This strategy has less number of underwriting commitments instead of 4 but it decreases the Chase’s underwriting fee by two-thirds. (sharing pie) Chase and Disney group opted for sub-underwriting strategy keeping in view of strengthening the relations with the local banks for future purpose. Talking about the Bengaluru International Airport Limited project, ICICI was the lead arranger without any sub-underwriting. Possible reason could be to avoid competition and its expertise in financing the private projects. Also we have observed that the contractor Siemens, L&T and Unique Zurich bagged high return above 50% which is quite a bit profitable. Connecting with the module regarding ‘Structuring the Project’ this is an interesting aspect to structure the project and make out huge profits. The major focus of the case study is the difficulties the contractors are facing due to several political pressures and changing conditions such as privatization of the Indian Airport sector.
Financing is an issue of greater concern in case of a project finance model. This is because; a project finance model usually has a very high ratio of debt (~80%) and is usually used in case of large projects. Thus the level of funding is very large, making it quite often impossible for a single bank to provide it. So it often requires a syndicate of banks to provide the funding. The non recourse nature of loans in PF, requires banks to scrutinize the project carefully and the entire procedure takes a lot of negotiation. The leading agency in Financing is the lead arranger and obtains extra fee for arranging the whole process. The financing stage begins once the project is evaluated and costs estimated, the end of financing stage is called Financial Closure, a milestone in the life of a project. The case studies explained the importance of lead arranger in financing and the various strategies employed by the lead arranger to stay in the business. In case of Hongkong Disney Land, Chase was new to Hongkong and was not familiar to the native people. So the strategy was to bring in local banks that were interested to be part of the syndicate. This was important as large amusement parks like Disney land are not proposed regularly and the status of being the sole arranger is not going to get Chase any advantage in entering other sectors. But the possibility of a good relation with local banks can provide Chase to enter other sectors where syndication is lead by them. But in case of Bangalore airport, ICICI bank was not new to Indians and also airports in India were an emerging sector. So the title of sole arranger for the project can provide ICICI bank considerable advantage in upcoming projects. Hence the decision to take the risk and syndicate the loan completely is well justified from the perception of ICICI bank. In the Chase case study, the strategy suited for a new geographical market in a sector with less investment opportunity in near future. And in case of Bangalore the strategy suited investment in a rapidly emerging sector. Hence it is not just the return on investment or risks involved, but also expansion strategies that influence the syndication decisions in a particular project.
The Hong Kong Disneyland Case study tells us that banks syndicate to achieve diversification in loan portfolios. Chase had three options : No bid, Bid to lose, Bid to win. It did not choose the “no bid” option as it was trying to choose a leadership position in Asia Pacific and this project provided a chance to make a healthy relationship with the government involved in the project. The financial problems faced by Disneyland Paris deterred them to choose “bid to win” option. So they chose bid to lose in order to maintain the relationship that they shared with Disneyland. The syndication was successful as the amount of subscription raised was thrice that was needed and Chase was able to attract the local banks despite the fact that it was not a local bank.
An interesting point to be noted in the Bangalore International Airport Case study was that the ICICI chose not to syndicate at all though the interest rates were high, because it wanted to shut out its competitors. This airport was the first one to be privatised and earning a name in making the project successful will give an extra edge to the reputation of the ICICI bank.
Financing the projects is the most important aspect as to how to get the cash for the project at optimal cost. Essentially every project has debt and equity in specified ratios as to maintain the credit rating or risk management. There can be two debts in a project. Initial debt for the construction of the project and the later to repay loans taken for construction. The initial debt is taken from banks as syndication loans and the later one is obtained from the bond markets. This is because faster mobilization is required for the initial construction of the project as bond markets take a long time to get the huge sums. Considering the syndication loans from the banks, there are various ways in which the loans can be obtained. Such options of syndication are discussed in the case of Chase Manhattan Bank for Hong Kong Disneyland. The various ranks in a syndication strategy are depicted based on their commitment. Chase has to make the choice of getting the enire promised amount from its balance sheets or involve multiple players. Of the three important syndication strategies – Single syndication is best, where Chase is the sole mandate with sub-underwriting shows that Chase has cut down its risks largely and is way above the other players in returns it gets. This can be justified as, being the sole mandate, the initial fee it pays in getting all the banks involved is the riskiest step. Also the involvement of the other banks helps in maintaining good relations in market as well as maintaining its reputation.
CE11B071 Financing projects module presents two very interesting case studies. Chases strategy of syndicating of the Hong Kong Disney Land showed the complexities involved and the various player involved in syndicating a loan of this amount. Chase had options of not bidding but this would upset the relation with Disney and also the pressure from the government, second being bid to win but at that point the project seemed unattractive and the earlier project Paris Disneyland had issues so, their option of bid to lose seemed to be the way. Fortunately they were called for further talks. Chase’s team recognized the opportunity in the project as they had sufficient funds for the projects, they can maximize their profits by a by being the sole arranger but opted for sharing the position this is being in good books for future syndications. The other interesting case study on financial closure was of BIAL where we see An SPV is created a with PPP structure, though the airport showed no profitability there were bidders as this was the first airport to be privatized we have seen the complexities involved and necessary amendments need to made. Further analysis showed strategy of the bank to not go for syndication and the profits earned by the consortium.
Financial Closure is major milestone in Project Finance and we see in this module how much of work goes into getting Financial Closure. In the Hongkong Disney case after securing all the contracts, we see how Chase and Disney have put so much effort in getting the syndication strategy right. We also see the roles of the mandated lead arranger, lead arranger, arranger, co-arranger, lead managers etc and how the responsibility that they take is compensated by higher fees at each level. We see how Chase brings in other banks so that it reduces its risk and also to earn goodwill from other banks. As Chase is a small player in the Hongkong market, it can anticipate that because of this goodwill, it will be able to get its hands on many such financing opportunities.
In other case, that of Bengaluru Airport, ICICI decided to not syndicate the loan and keep the whole loan in its book so as to not limit other banks (competitors) get any exposure into airports sector and develop expertise in it as ICICI anticipated a large market to develop subsequently. We also see the same strategy being employed by L&T as after completing the Bengaluru airport it exited very early with huge profits and after that it has been successful in getting into all the major airport projects in India.
Thus we have seen many features of the financing of project finance such as different syndication strategies, active and passive investors and know broadly how financing of infrastructure takes place.
CE11B072 Hong Kong Disneyland Loan case: Through this case Syndicated Bank Lending concept was introduced to us. In the syndication process, group of banks unite to provide loan to a borrower. Usually, one bank acts as the administrative agent for the syndication to keep track the borrowings and repayments. Banks take different positions in this process. The different positions are Underwriter, Lead Arrangers/Sub-Underwriter, Arranger, Co-Arranger, Lead Manager and Manager. Based on the position of the bank, they can commit to provide certain amount of loan and get interest, underwriting fee and commitment fee. Roles of the Underwriter and the expectations from them were discussed. Syndication strategies proposed by Chase are discussed and then evaluated. In this module, Mezzanine Financing and Subordinated debt concepts were discussed. A subordinated loan requires payment of interest after the senior debt but before dividends. This means the sponsor’s remuneration is more certain than just relying on dividends and also reduces volatility of returns on total fund contributed to the project. Dividend trap concept was also discussed.
CE14D040
ReplyDeleteFinancing project is arranging the funds required for a project. The end of the financing stage is marked by financial closure which is a milestone in concession contracts. The concessionaire has to arrange the funds required for the construction of the project through equity or debt. In the earlier modules we saw that project finance is the most preferred mode of financing in infrastructure projects.
Debt is the most preferred finance option in the project finance. There is normally a gearing ratio (debt equity ratio) of 3:1 in infrastructure projects. Debt financing is obtained from banks through syndication. In syndication, multiple banks come together to finance the project to share the profits and risks. Also, syndication allows for diversification in loan portfolios so that even if one project fails, the effect is less on the bank. In syndication we saw the role of the lead arranger, Co-arranger, lead manager, co-manager and participant. We discussed this through case study on syndicating the Hong Kong Disneyland loan.
When the concessionaire is able to arrange the equity and debt for construction of the project, financial closure is complete. We discussed financial closure in detail in class through the Bangaluru International Airport case study. In the case study, we saw the opportunistic behaviour of active equity holders and wait for a major announcement in 2015 from Siemens as the lock in period is coming to an end.
When construction is complete through the money obtained from syndication loan and the when the project enters the operation stage, the concessionaire prefers to refinance the syndicated loan with public bonds. Public bonds have less interest rate compared to syndicate loans and hence are preferred by concessionaire. However, public bonds are not used during the construction stage because of interest arbitrage.
MS15D002 M R Aravindan
ReplyDeleteFinancing Projects
Two cases were discussed in this module. The first involved strategy by Chase Manhattan Bank to syndicate loans for Hong Kong Disneyland loan project and the other involved Financial closure of Bengaluru International Airport.
In the first case, we learnt about the roles played by the lead arranger and underwriter, by the co-arrangers, lead manager, co-manager and participants. Chase had to select between being a sole lead arranger without any sub-underwriters or as a sole arranger having sub-underwriting to share the risk of underwriting. Though the preliminary survey of potential lenders indicated that the debt issue would be oversubscribed, it would be a better strategy for Chase to take on board sub-underwriters. Although this strategy might reduce the fees accruing to Chase, it will protect Chase from taking the entire loan on its balance sheet in the unlikely event of it not being able to arrange lenders for the entire HK$ 3.3 billion. This also ensured goodwill with other competing arranger banks who would look for Chase as a partner for large deals sourced by them in future. In this case, we also saw how Chase as a sole arranger reaped a lion’s share of the fees.
In the Bengaluru Airport case, we saw that the sponsors who took the initial risk – such as L&T, Siemens and Unique Zurich- reaped phenomenal returns. L&T also, having secured the construction contract as part of the deal, became the only EPC contractor with modern airport construction capability. This helped L&T to secure EPC jobs from the subsequent privatized airports like Hyderabad, Delhi and Mumbai as well. We also saw that ICICI was the sole arranger and lender for this project. As the project debt was quite small from ICICI’s point of view, they could fund the entire amount. Also, they did not want to encourage competition in the field of airport financing!
This comment has been removed by the author.
ReplyDeleteCE11B074, Harishchandra Meena
ReplyDeleteThe Hong Kong Disneyland case study shows the importance and the role played by the underwriters whose job is to ensure smooth syndication. In this case the project company could not deal with all 25 banks on one to one basis. Hence the underwriters formed an interface between the Project Company and the Lenders.
The expectations of project company from the underwriter are:-
• To raise capital
• To ensure faster delivery of funds
• To make sure that the banks are flexible.
The expectations of lenders from underwriters are:
• To act as a guarantee that the project is credit worthy
• To have a certain level of commitment levels (so upfront underwriting fee is charged)
In this module, we also discussed the risk profile of projects – the risk associated with the project decreases with increase in privatisation (BOT < BOOT < BOO). Generally, projects with high public good characteristics are implemented on BOT structure. Highest degree of competition is usually faced by the BOO structured projects (like the telecommunications).
Bangalore International Airport Case study involves two types of investors – passive (Public entities – AAI, KSIIDC) and active investors (Private – Siemens, L & T, UZ). Project structuring is helpful in such cases to make sure that the project is implemented without any trouble, make the revenues attractive and to ensure that high privatisation is not conveyed. GVK showed high interest in the Bangalore Airport as it was the first airport to be privatised and the concession was low – 4% of the total revenues – it was a good opportunity to earn high reputation in the airport sector.
CE11B073: The case on Chase's strategy was the first case that provided an insight into the lenders side of financing an infrastructure project. This case also exposed us to an interesting bid-to-lose strategy, where the bank had to bid high enough to appear to want to win but not high enough to actually win. This manoeuvre was performed to retain loyalty with Disney and to appear as if they are interested in such large projects which demand long maturity periods. In this case, we saw that Chase, being the lead arranger received much higher returns for its investments than the other banks because it was their responsibility to manage the syndication and because they had committed to underwrite the full amount (and not just put their best efforts).
ReplyDeleteIn the BIAL project, it seemed as if the private sponsors were raring to sell their equity and leave the project. They were able to do so and obtain high revenues in the process. One would wonder why this is so because if they were able to sell the equity for such high prices, then there is surely more money to be made by retaining the project. But the expertise of companies like L & T and Siemens lie in construction and not operation of airports. Once constructed, it is more profitable for them to sell their equity and move on to the next construction project. Mr. T. S. Venkatesh during his lecture mentioned that L&T does not maintain any emotional attachment to the projects it does. The behaviour of the private sponsors is in contrast with that of ICICI bank which did not syndicate the loan so that it could retain its position as the only bank which has financed a private airport project in India.
CE11B070 B. Pavan Kumar
ReplyDeleteThe fourth module started with the concept of syndication of a loan transaction. Basically, loan can be taken in two types, from a sole lender or a syndicated loan. Syndication is the process where an arranger gets the duty of accumulating money from a set of other banks. Also, the concept of sub-ordinated debt was studied. Sub-ordinated debt is the loan with slightly higher interest rate but is repaid only after the main debt is cleared. Hong kong Disney land loan case study was studied in which how chase has won the bid for arranging loans was discussed and the strategies proposed by the chase for syndication are evaluated. Financial project modelling was then studied. The calculations of NPV and IRR is seen, with the emphasis on how bad things go when projections are wrongly made. Financial closure of BIAL case is discussed in the third session of this module. The extremely high rate of returns obtained by the all 3 companies when they exited and sold their stakes the project was interesting to observe as they being the companies that raised the debt had exited before repaying the loans. L&T now has got better opportunities in the field of Airports. Here, it is more profitable for them to sell their equity and move on to the next construction project as they were construction companies and not operation companies. The process of financial closure is seen in this case.
CE11B070 B. Pavan Kumar
ReplyDeleteThe fourth module started with the concept of syndication of a loan transaction. Basically, loan can be taken in two types, from a sole lender or a syndicated loan. Syndication is the process where an arranger gets the duty of accumulating money from a set of other banks. Also, the concept of sub-ordinated debt was studied. Sub-ordinated debt is the loan with slightly higher interest rate but is repaid only after the main debt is cleared. Hong kong Disney land loan case study was studied in which how chase has won the bid for arranging loans was discussed and the strategies proposed by the chase for syndication are evaluated. Financial project modelling was then studied. The calculations of NPV and IRR is seen, with the emphasis on how bad things go when projections are wrongly made. Financial closure of BIAL case is discussed in the third session of this module. The extremely high rate of returns obtained by the all 3 companies when they exited and sold their stakes the project was interesting to observe as they being the companies that raised the debt had exited before repaying the loans. L&T now has got better opportunities in the field of Airports. Here, it is more profitable for them to sell their equity and move on to the next construction project as they were construction companies and not operation companies. The process of financial closure is seen in this case.
CE11B096 Y V Sandeep
ReplyDeleteThere are different options available to choose how funds are to be arranged for a project. They are debt, equity and sub-ordinated debt. We have seen the advantages of opting out for sub-ordinated debt and the negative equity concept which is basically insolvency of the company. There are several sources from which these funds can be mobilized. Some of them are international financial institutions, multilateral financing agencies and export credit agencies.
Coming to the Chase’s strategy for syndicating Hong Kong Disneyland loan,
Chase team came up with 3 possible ways of syndicating the loan of $3.3billion required all of which are fully underwritten.
1. Chase is the mandated lead arranger bringing $660million and 4 banks will take up the responsibility of sub-underwriters bringing in $660million each. This would potentially reduce the risk of bringing $3.3billion to $660milion. This type of syndication has lesser risk on Chase bank because the risk is absorbed by the borrower that if the market doesn’t accept the deal he should pay higher fees to entice greater participation. (High fee + Less risk)
2. Chase can be a sole mandated lead arranger without any sub-underwriting arranging the whole $3.3billion by itself. Although this would gain them the sub-underwriting fee it would expose them to higher risk of $3.3billion compared to $66.million. (High fee+ high risk)
3. Chase and 2 other banks would be the mandated lead arrangers with no sub-underwriters bringing $1.1billion each. This strategy has less number of underwriting commitments instead of 4 but it decreases the Chase’s underwriting fee by two-thirds. (sharing pie)
Chase and Disney group opted for sub-underwriting strategy keeping in view of strengthening the relations with the local banks for future purpose.
Talking about the Bengaluru International Airport Limited project, ICICI was the lead arranger without any sub-underwriting. Possible reason could be to avoid competition and its expertise in financing the private projects. Also we have observed that the contractor Siemens, L&T and Unique Zurich bagged high return above 50% which is quite a bit profitable. Connecting with the module regarding ‘Structuring the Project’ this is an interesting aspect to structure the project and make out huge profits. The major focus of the case study is the difficulties the contractors are facing due to several political pressures and changing conditions such as privatization of the Indian Airport sector.
Financing is an issue of greater concern in case of a project finance model. This is because; a project finance model usually has a very high ratio of debt (~80%) and is usually used in case of large projects. Thus the level of funding is very large, making it quite often impossible for a single bank to provide it. So it often requires a syndicate of banks to provide the funding. The non recourse nature of loans in PF, requires banks to scrutinize the project carefully and the entire procedure takes a lot of negotiation. The leading agency in Financing is the lead arranger and obtains extra fee for arranging the whole process. The financing stage begins once the project is evaluated and costs estimated, the end of financing stage is called Financial Closure, a milestone in the life of a project.
ReplyDeleteThe case studies explained the importance of lead arranger in financing and the various strategies employed by the lead arranger to stay in the business. In case of Hongkong Disney Land, Chase was new to Hongkong and was not familiar to the native people. So the strategy was to bring in local banks that were interested to be part of the syndicate. This was important as large amusement parks like Disney land are not proposed regularly and the status of being the sole arranger is not going to get Chase any advantage in entering other sectors. But the possibility of a good relation with local banks can provide Chase to enter other sectors where syndication is lead by them.
But in case of Bangalore airport, ICICI bank was not new to Indians and also airports in India were an emerging sector. So the title of sole arranger for the project can provide ICICI bank considerable advantage in upcoming projects. Hence the decision to take the risk and syndicate the loan completely is well justified from the perception of ICICI bank.
In the Chase case study, the strategy suited for a new geographical market in a sector with less investment opportunity in near future. And in case of Bangalore the strategy suited investment in a rapidly emerging sector. Hence it is not just the return on investment or risks involved, but also expansion strategies that influence the syndication decisions in a particular project.
CE11B045, Pooja Battagani
ReplyDeleteThe Hong Kong Disneyland Case study tells us that banks syndicate to achieve diversification in loan portfolios. Chase had three options : No bid, Bid to lose, Bid to win. It did not choose the “no bid” option as it was trying to choose a leadership position in Asia Pacific and this project provided a chance to make a healthy relationship with the government involved in the project. The financial problems faced by Disneyland Paris deterred them to choose “bid to win” option. So they chose bid to lose in order to maintain the relationship that they shared with Disneyland. The syndication was successful as the amount of subscription raised was thrice that was needed and Chase was able to attract the local banks despite the fact that it was not a local bank.
An interesting point to be noted in the Bangalore International Airport Case study was that the ICICI chose not to syndicate at all though the interest rates were high, because it wanted to shut out its competitors. This airport was the first one to be privatised and earning a name in making the project successful will give an extra edge to the reputation of the ICICI bank.
Financing the projects is the most important aspect as to how to get the cash for the project at optimal cost. Essentially every project has debt and equity in specified ratios as to maintain the credit rating or risk management. There can be two debts in a project. Initial debt for the construction of the project and the later to repay loans taken for construction. The initial debt is taken from banks as syndication loans and the later one is obtained from the bond markets. This is because faster mobilization is required for the initial construction of the project as bond markets take a long time to get the huge sums. Considering the syndication loans from the banks, there are various ways in which the loans can be obtained. Such options of syndication are discussed in the case of Chase Manhattan Bank for Hong Kong Disneyland. The various ranks in a syndication strategy are depicted based on their commitment. Chase has to make the choice of getting the enire promised amount from its balance sheets or involve multiple players. Of the three important syndication strategies – Single syndication is best, where Chase is the sole mandate with sub-underwriting shows that Chase has cut down its risks largely and is way above the other players in returns it gets. This can be justified as, being the sole mandate, the initial fee it pays in getting all the banks involved is the riskiest step. Also the involvement of the other banks helps in maintaining good relations in market as well as maintaining its reputation.
ReplyDeleteCE11B071
ReplyDeleteFinancing projects module presents two very interesting case studies. Chases strategy of syndicating of the Hong Kong Disney Land showed the complexities involved and the various player involved in syndicating a loan of this amount. Chase had options of not bidding but this would upset the relation with Disney and also the pressure from the government, second being bid to win but at that point the project seemed unattractive and the earlier project Paris Disneyland had issues so, their option of bid to lose seemed to be the way. Fortunately they were called for further talks. Chase’s team recognized the opportunity in the project as they had sufficient funds for the projects, they can maximize their profits by a by being the sole arranger but opted for sharing the position this is being in good books for future syndications. The other interesting case study on financial closure was of BIAL where we see An SPV is created a with PPP structure, though the airport showed no profitability there were bidders as this was the first airport to be privatized we have seen the complexities involved and necessary amendments need to made. Further analysis showed strategy of the bank to not go for syndication and the profits earned by the consortium.
Zubin Nayak, MS14S018
ReplyDeleteFinancial Closure is major milestone in Project Finance and we see in this module how much of work goes into getting Financial Closure. In the Hongkong Disney case after securing all the contracts, we see how Chase and Disney have put so much effort in getting the syndication strategy right. We also see the roles of the mandated lead arranger, lead arranger, arranger, co-arranger, lead managers etc and how the responsibility that they take is compensated by higher fees at each level. We see how Chase brings in other banks so that it reduces its risk and also to earn goodwill from other banks. As Chase is a small player in the Hongkong market, it can anticipate that because of this goodwill, it will be able to get its hands on many such financing opportunities.
In other case, that of Bengaluru Airport, ICICI decided to not syndicate the loan and keep the whole loan in its book so as to not limit other banks (competitors) get any exposure into airports sector and develop expertise in it as ICICI anticipated a large market to develop subsequently. We also see the same strategy being employed by L&T as after completing the Bengaluru airport it exited very early with huge profits and after that it has been successful in getting into all the major airport projects in India.
Thus we have seen many features of the financing of project finance such as different syndication strategies, active and passive investors and know broadly how financing of infrastructure takes place.
CE11B072
ReplyDeleteHong Kong Disneyland Loan case:
Through this case Syndicated Bank Lending concept was introduced to us. In the syndication process, group of banks unite to provide loan to a borrower. Usually, one bank acts as the administrative agent for the syndication to keep track the borrowings and repayments. Banks take different positions in this process. The different positions are Underwriter, Lead Arrangers/Sub-Underwriter, Arranger, Co-Arranger, Lead Manager and Manager. Based on the position of the bank, they can commit to provide certain amount of loan and get interest, underwriting fee and commitment fee. Roles of the Underwriter and the expectations from them were discussed. Syndication strategies proposed by Chase are discussed and then evaluated.
In this module, Mezzanine Financing and Subordinated debt concepts were discussed. A subordinated loan requires payment of interest after the senior debt but before dividends. This means the sponsor’s remuneration is more certain than just relying on dividends and also reduces volatility of returns on total fund contributed to the project. Dividend trap concept was also discussed.