I was wondering which motives we have learned so far, that justify the use of project finance instead of corporate finance. I remember the following reasons:
- better diversification of risk (the player that can handle the risk most efficiently, assumes the risk) - enables high leverage investments for sponsors - improved financial means for project funding - alignment of interest mitigates agency problems [Chad-Cameroon Petroleum Development and Pipeline Project] - balance sheet treatment (keeps up the loan limit, improves the rating for the sponsor) - limited recourse for sponsor
If you have more ideas about that, you are welcome to add your thoughts!
Structuring Projects In this module, we discussed two case studies – Chad-Cameroon Petroleum Development and Calpine Corporation.
In the Chad Cameroon case we saw how the global oil companies exploit the natural resources of poor countries through project structuring that allows them to recover most of their investment in the initial years of the project’s life. The project, having an inherent risk of appropriation by the local government/dictators, is protected by sourcing debt from multi-lateral agencies like the World Bank. We saw that this project is a win-win for all concerned - The global oil majors get good returns on their investment, the poor countries are able to develop their oil resources and get a steady income without any investment from their side and the World Bank is able to fulfill its mandate to provide funds for development projects in the least developed countries.
In the Calpine Corporation case, we saw how a typical project finance structure works and saw the evolution of Calpine Corporation from a project finance structure for individual projects to a corporate finance structure for a portfolio of projects. The projects were standardized to reduce costs substantially and a Secured Revolving Construction Facility with a four year maturity was arranged from lenders. This debt funding was in the form of corporate finance and was used to construct four power plants (project portfolio). This significantly reduced the time for negotiating individual project loans as well as individual contracts with equipment suppliers and EPC contractors.
Project structuring is the process of finding the best model through which the project can be awarded. In India, before New economic Policy (NEP), the procurement option for infrastructure projects were Engineering – procurement and construction (EPC). Now, the most preferred structure is PPP with an objective to reduce the Government’s fiscal deficit. The structure of a project is characterised by the local conditions, project modalities and risk addressing tools available. Vives framework can be used for project structuring. The role of World bank and IFC is to improve the local environment of the project so as to enable privatisation.
As mentioned by my friends, structuring a project depends on several factors such as type of project, financing options available, economic situation of a nation etc. It is of significant concern to the sponsor and other contractors/major stakeholders of the SPV as it ultimately reflects the shared proportion of project returns to fulfil their IRR and the available exit options in future. The private sponsors in Chad-Cameroon Petroleum Development and Pipeline Project developed an ingenious project finance structure where they are able to get back 85% of the expected revenues in the first 10 years starting from the operation phase of the project. Despite this risk of the private sponsors pulling off from the SPV within the first few years of the project, the project meets the needs of both the governments getting steady income without any investment, World Bank’s participation in developing infrastructure in the poor countries, the main sponsors getting their expected returns. In Calpine Corporation case study, to accommodate the company’s growth strategy it opted for revolving credit kind of structure to project finance and traditional corporate structure. • With respect to time this kind of structure consumes lesser time when compared to other two strategies. This is because all the four power plants can be financed in a single transaction also saving legal and other fees • With respect to feasibility this kind of structure allows the sponsors to manage the power plants as a system • With respect to issuance and carrying cost this kind of structure is costlier when compared to other alternatives • Refinancing risk for this kind of structure is higher when compared to corporate finance
CE11B074, Harishchandra Meena Module 2 emphasizes on (i) Structuring the projects (ii) Evolution from project to corporate finance. My key learnings are as follows:- 1. The chad – Cameroon case brings out the concept of Asset Specificity of infrastructure projects. The oil pipelines, once laid, can be used to transport only oil and not water or something else .To make sure that the government’s interests are aligned and not diversified, they were involved in the project by giving an equity. Project finance helps to create this alignment of interest and hence the downstream part of the project was structured as project finance to make the governments of chad and Cameroon more responsible participants of the project. 2. The calpine case study discusses the role of a manager in creating share holder wealth which can be done in following ways:- • By taking up good projects • By optimising expenditure • Through innovation • By improving efficiency These are achieved by using the funds judiciously. Once exhausted, sources of funds can be manipulated/restructured/rearranged creatively to incur maximum benefits. The strategy adopted was to increase the return on investment capital without compromising on the credit rating. The debt to capitalisation ratio was decrease from 79% to 65% to get investment grade rating (BBB- or higher).They also started looking for bond markets because of size limitations posed by bank loan markets.Bond markets are bigger , give cash up-front and have less risk of negative arbitrage, as compared to the bank market.
CE11B070 B. Pavan Kumar The second module of this course dealt with the structuring of infrastructure project and advantages of cautious and appropriate structuring for the stakeholders. Use of case studies made the learning more interesting. There are two cases discussed, chad-Cameroon and Calpine Corporation along with the clear understanding of some important terms such as Debt rating, asset specificity, Asset beta, upfront cost and carrying cost. Chad-Cameroon case particularly highlighted the difference in the usage of private and corporate finance. In this case the second part of the project was structured as project finance to ensure that the governments of chad and Cameroon doesn’t default against the project. Risk mitigation by sharing of duties between the private company and government was seen. The major differences between the bond markets and bank markets are studied, which include things like bond market being less expensive, longer time taking and duration and several other differences. A key point that was understood is that it is better and easier for the projects to take loans from bank markets initially and then later replace them by bond markets. The role of world banks in infrastructure projects is discussed and how they see to develop the countries with poor infrastructure. Calpine corporation case study also dealt with the importance of innovative structuring for obtaining better gains. Here few good points to be noted are that we cannot choose the type of financing by looking at other project but has to consider and evaluate the particular case. The advantages and disadvantages of revolving credit facility are studied.
CE11B070 B. Pavan Kumar The second module of this course dealt with the structuring of infrastructure project and advantages of cautious and appropriate structuring for the stakeholders. Use of case studies made the learning more interesting. There are two cases discussed, chad-Cameroon and Calpine Corporation along with the clear understanding of some important terms such as Debt rating, asset specificity, Asset beta, upfront cost and carrying cost. Chad-Cameroon case particularly highlighted the difference in the usage of private and corporate finance. In this case the second part of the project was structured as project finance to ensure that the governments of chad and Cameroon doesn’t default against the project. Risk mitigation by sharing of duties between the private company and government was seen. The major differences between the bond markets and bank markets are studied, which include things like bond market being less expensive, longer time taking and duration and several other differences. A key point that was understood is that it is better and easier for the projects to take loans from bank markets initially and then later replace them by bond markets. The role of world banks in infrastructure projects is discussed and how they see to develop the countries with poor infrastructure. Calpine corporation case study also dealt with the importance of innovative structuring for obtaining better gains. Here few good points to be noted are that we cannot choose the type of financing by looking at other project but has to consider and evaluate the particular case. The advantages and disadvantages of revolving credit facility are studied.
CE11B073: The Calpine case was an example of a company growing aggressively to utilize the arbitrage opportunity provided by the more efficient Combined-Cycle Gas Fired power plant. The company wanted to construct multiple such power plants and gain market dominance for which it needed huge amounts of funding. For financing this project, Calpine couldn't use Corporate Finance as it would be riskier because of the possibility of negative arbitrage and volatility of the market (the company had low debt rating). Project Finance could not be done as each of the deals would take a long time. The Revolving Credit Facility was an innovative strategy that they used. If we view construction of the n power plants as a single project, this is just like Project Finance. The SPV would borrow money for executing this project (n power plants) and the bank would be repaid only from the revenue generated by this project (the n power plants). The repayment period was generous enough to allow time to construct multiple power plants. Using this structure Calpine was able to avoid time delays that would occur if each individual plant had to be project financed separately.
CE11B071 Structuring projects module covers two case studies Chad Cameroon petroleum development and pipeline project and Calpine corporation. The case studies highlighted what constitutes to project structure. Chad Cameroon petroleum development and pipeline project highlighted asset specificity of such infrastructure projects, Chad being one of the poorest countries with politically unstable government had hope of improving the country’s economic state through this project. Cameroon benefitted from pipeline passing through it till Kirbi. Consortium of Exxon Mobil, Petronas and Chevron had showed interest in extraction of oil and its transport, the sponsors required guarantee against the political risk, here is when World Bank steps in. The major aspect of discussion was whether World Bank should back the project or not as project is structured in such a way that the sponsor receives early returns which seems to be not fair to an extent but, there were other influences of NGOs and Libya and Sudan option. This case study highlighted characteristics of infrastructure investment – bulk capital investment, delayed revenues till the pipeline is laid, cash flows spread over long term, constant operating cost, high operating margins, opportunistic behavior and asset specificity. Second case study of the Calpine Corporation which brought in new concepts of waterfall funding, cash trap account, difference between bond market and bank market, junior debt , EBIAT, asset beta etc. the project financing had three alternatives – Project Finance, Cooperate Finance and Revolving Construction facility structure the pro and cons of each alternative was discussed, in this case corporate finance seemed optimal choice as the refinancing risk is less , comparatively issuance cost is less and has lightly higher flexibility. It is faster than project financing.
CE11B072 Calpine Corporation case: Calpine had aimed to become low-cost producer to become one of the largest profitable power generators in America. So Calpine had started its own construction company, developed an in-house maintenance group and had cut down the ineffective management costs. It had to apply cost reductions to finance functions as well to become low-cost power producer. They had three options: use project finance, use corporate finance and try a hybrid option with the elements of both project and corporate finance. With project finance, Calpine can’t control the power plants as a system and it deals with time and cost of structuring individual deals. With corporate finance, large debt might jeopardize its debt rating and equity is the most expensive capital form. The third option is to borrow money in a secured revolving credit facility which helps in financing the four plants in one transaction and can able to raise large debt. Through this case few new concepts were introduced to us are Cash Trap Account, waterfall cash flows and debt capacity.
Project Structure essentially means the way the project is financially structured. How are the stakeholders connected? How are the benefits shared? How are the payments made? How effectively are the risks mitigated? These are the questions answered by a project structure. Project Finance indicates the creation of a special purpose vehicle solely for the project itself. It approaches the bond markets and equity markets. And the stakeholders (lenders and equity holders) have recourse only to the project cash-flows. In the case of Chad- Cameroon, the way the project is structured enables the private player the advantage of early high cash flows. This has the risk of players exiting the project after they have made their money. In Calpine case the revolving credit facility is the new project structure proposed which enabled the project company to availability of one billion dollars loan, every time after the previous loan is paid. In this model the number of plants in the future is unknown and it considered to as risk in other project structures. But in revolving credit facility it does not depend on the number of plants , thereby eliminating that element of risk. This is to show how project structuring helps in eliminating the risks. Also the repayment was quite favourable, as it allowed enough time for construction. The Calpine Construction Finance Co. is the SPV(project finance) that takes care of the a set of power plants(corporate finance).
We came to know about structuring of projects through two case studies – Chad Cameroon and Calpine. In the former one, we saw two types of financing in one project : Upstream Operations based on Corporate Finance and Downstream Operations based on Project Finance. From the table given in Exhibit 4-4 A on Project financing and Cash flows, we observe the following: • Large upfront investment is needed. • Inflows occur only after substantial capital expenditure. • Revenues are spread over long period of time. • Operating costs are fairly constant and does not vary with the outflow. • The operation margins = revenue – operating costs, are high which means debt and interests can be met readily. • In the first 10 years, Exxon gets a high return of 83.5% which leaves with the fear that there is a possibility that Exxon may exit the project in near future after obtaining sufficient return.
In the Calpine Case Study, we saw the emergence of Merchant Power Plants after IPP (Independent Power Project). These plants have not guarantee of revenues as there is no power purchase agreement. Calpine uses project financing to improve their credit rating by getting surplus return. As discussed in class, out of the two options (i) Higher issuance + Lower carrying cost and (ii) Lower issuance and higher carrying cost, Calpine should choose the latter as issuance cost won’t change much in the future but there is always a chance that the credit rating will improve if Calpine performs well which will decrease the carrying cost. Cost, flexibility, time, feasibility and refinancing risk are some of the parameters that will decide which mode of financing to choose (Corporate, Project finance, Revolving Credit Facility)
We learnt the various characteristics of Project Finance such as- • Large upfront costs (Chad-Cameron case shows that many large companies were brought in for the project) • Inflows only after substantial capital expenditure (around 2 years of time is required for setting up the projects and unlike other projects, revenue generation starts only after the project is complete) • Revenues spread over long periods (typical power plants function for 30 years, as in Calpine case) • Fixed (and generally low) operating costs • High operating margins once steady state is achieved (High operating margins for Exxon Mobil etc.) • Asset specificity (and how to avoid opportunistic behaviour of governments or regulators, which is demonstrated by bringing in World Bank and IFc in Chad- Cameroon case)
We learnt how projects are structured in unique ways in each case to exploit the advantages and to minimise the risk. Exxon-Mobil, the largest sponsor of Chad-Cameroon project brought in World Bank, IFC, Govt. of Chad and Cameroon to contain the risks. Calpine is mulling over the various options its has to finance its expansion and is trying to find the best match for its specific plans. Thus proper structuring of projects is critical to the success of a project.
Project financing model helps in creating Project models which can mitigate risks effectively. The Chad Cameroon case study was a good example for this. The Oil companies insisted on International agency funding for the project and divided the whole project as parts coming under individual SPVs with due share of equity for the govt: ,mainly in the pipeline segment. This can mitigate the large political risk existing in Chad and Cameroon. The project was so structured so that the equity investment by govt: will ensure governmenta cooperation throughout the project and the revenue sharing ensured that the companies could obtain the larger part of their investments in the initial few years. Since for such projects level of risk is higher when looking to a longer term especially in unstable nations. Hence efficient project structuring was successful in eliminating most of the risks for Companies. But it was unfair for the nations as structure made the govt: to recover their investments mostly in the later periods of the project life. This structure clear shifts a lot of risk to the govt: as now there is a high chance that the companies can quit after recovering most of their investment and leave the govt: as the loser. This case also proves how complexity in project structure helps the best person in the room to shift a project to his best advantage from a totally opposite scenario. This also indicates importance of project structuring in creating seemingly impossible and high risk projects. The Calpine case study showed the additional opportunities for growth with newer models of financing. The possibility of obtaining financing from banks across the world and modeling it to suit the interest of both the company and investors is a good example how project structuring and flexible project finance models can promote huge dreams of smaller companies with high capacity of growth and efficient leadership. Calpine, with its then financial capacity would have been never able to finance such a huge growth strategy without such efficient project finance structures.
Philip Baumgärtner (MS15F007):
ReplyDeleteI was wondering which motives we have learned so far, that justify the use of project finance instead of corporate finance. I remember the following reasons:
- better diversification of risk (the player that can handle the risk most efficiently, assumes the risk)
- enables high leverage investments for sponsors
- improved financial means for project funding
- alignment of interest mitigates agency problems [Chad-Cameroon Petroleum Development and Pipeline Project]
- balance sheet treatment (keeps up the loan limit, improves the rating for the sponsor)
- limited recourse for sponsor
If you have more ideas about that, you are welcome to add your thoughts!
MS15D002 M R Aravindan
ReplyDeleteStructuring Projects
In this module, we discussed two case studies – Chad-Cameroon Petroleum Development and Calpine Corporation.
In the Chad Cameroon case we saw how the global oil companies exploit the natural resources of poor countries through project structuring that allows them to recover most of their investment in the initial years of the project’s life. The project, having an inherent risk of appropriation by the local government/dictators, is protected by sourcing debt from multi-lateral agencies like the World Bank. We saw that this project is a win-win for all concerned - The global oil majors get good returns on their investment, the poor countries are able to develop their oil resources and get a steady income without any investment from their side and the World Bank is able to fulfill its mandate to provide funds for development projects in the least developed countries.
In the Calpine Corporation case, we saw how a typical project finance structure works and saw the evolution of Calpine Corporation from a project finance structure for individual projects to a corporate finance structure for a portfolio of projects. The projects were standardized to reduce costs substantially and a Secured Revolving Construction Facility with a four year maturity was arranged from lenders. This debt funding was in the form of corporate finance and was used to construct four power plants (project portfolio). This significantly reduced the time for negotiating individual project loans as well as individual contracts with equipment suppliers and EPC contractors.
CE14D040
ReplyDeleteProject structuring is the process of finding the best model through which the project can be awarded. In India, before New economic Policy (NEP), the procurement option for infrastructure projects were Engineering – procurement and construction (EPC). Now, the most preferred structure is PPP with an objective to reduce the Government’s fiscal deficit. The structure of a project is characterised by the local conditions, project modalities and risk addressing tools available. Vives framework can be used for project structuring. The role of World bank and IFC is to improve the local environment of the project so as to enable privatisation.
CE11B096 Y V Sandeep
ReplyDeleteAs mentioned by my friends, structuring a project depends on several factors such as type of project, financing options available, economic situation of a nation etc. It is of significant concern to the sponsor and other contractors/major stakeholders of the SPV as it ultimately reflects the shared proportion of project returns to fulfil their IRR and the available exit options in future.
The private sponsors in Chad-Cameroon Petroleum Development and Pipeline Project developed an ingenious project finance structure where they are able to get back 85% of the expected revenues in the first 10 years starting from the operation phase of the project. Despite this risk of the private sponsors pulling off from the SPV within the first few years of the project, the project meets the needs of both the governments getting steady income without any investment, World Bank’s participation in developing infrastructure in the poor countries, the main sponsors getting their expected returns.
In Calpine Corporation case study, to accommodate the company’s growth strategy it opted for revolving credit kind of structure to project finance and traditional corporate structure.
• With respect to time this kind of structure consumes lesser time when compared to other two strategies. This is because all the four power plants can be financed in a single transaction also saving legal and other fees
• With respect to feasibility this kind of structure allows the sponsors to manage the power plants as a system
• With respect to issuance and carrying cost this kind of structure is costlier when compared to other alternatives
• Refinancing risk for this kind of structure is higher when compared to corporate finance
CE11B074, Harishchandra Meena
ReplyDeleteModule 2 emphasizes on (i) Structuring the projects (ii) Evolution from project to corporate finance. My key learnings are as follows:-
1. The chad – Cameroon case brings out the concept of Asset Specificity of infrastructure projects. The oil pipelines, once laid, can be used to transport only oil and not water or something else .To make sure that the government’s interests are aligned and not diversified, they were involved in the project by giving an equity. Project finance helps to create this alignment of interest and hence the downstream part of the project was structured as project finance to make the governments of chad and Cameroon more responsible participants of the project.
2. The calpine case study discusses the role of a manager in creating share holder wealth which can be done in following ways:-
• By taking up good projects
• By optimising expenditure
• Through innovation
• By improving efficiency
These are achieved by using the funds judiciously. Once exhausted, sources of funds can be manipulated/restructured/rearranged creatively to incur maximum benefits.
The strategy adopted was to increase the return on investment capital without compromising on the credit rating. The debt to capitalisation ratio was decrease from 79% to 65% to get investment grade rating (BBB- or higher).They also started looking for bond markets because of size limitations posed by bank loan markets.Bond markets are bigger , give cash up-front and have less risk of negative arbitrage, as compared to the bank market.
CE11B070 B. Pavan Kumar
ReplyDeleteThe second module of this course dealt with the structuring of infrastructure project and advantages of cautious and appropriate structuring for the stakeholders. Use of case studies made the learning more interesting. There are two cases discussed, chad-Cameroon and Calpine Corporation along with the clear understanding of some important terms such as Debt rating, asset specificity, Asset beta, upfront cost and carrying cost. Chad-Cameroon case particularly highlighted the difference in the usage of private and corporate finance. In this case the second part of the project was structured as project finance to ensure that the governments of chad and Cameroon doesn’t default against the project. Risk mitigation by sharing of duties between the private company and government was seen. The major differences between the bond markets and bank markets are studied, which include things like bond market being less expensive, longer time taking and duration and several other differences. A key point that was understood is that it is better and easier for the projects to take loans from bank markets initially and then later replace them by bond markets. The role of world banks in infrastructure projects is discussed and how they see to develop the countries with poor infrastructure. Calpine corporation case study also dealt with the importance of innovative structuring for obtaining better gains. Here few good points to be noted are that we cannot choose the type of financing by looking at other project but has to consider and evaluate the particular case. The advantages and disadvantages of revolving credit facility are studied.
CE11B070 B. Pavan Kumar
ReplyDeleteThe second module of this course dealt with the structuring of infrastructure project and advantages of cautious and appropriate structuring for the stakeholders. Use of case studies made the learning more interesting. There are two cases discussed, chad-Cameroon and Calpine Corporation along with the clear understanding of some important terms such as Debt rating, asset specificity, Asset beta, upfront cost and carrying cost. Chad-Cameroon case particularly highlighted the difference in the usage of private and corporate finance. In this case the second part of the project was structured as project finance to ensure that the governments of chad and Cameroon doesn’t default against the project. Risk mitigation by sharing of duties between the private company and government was seen. The major differences between the bond markets and bank markets are studied, which include things like bond market being less expensive, longer time taking and duration and several other differences. A key point that was understood is that it is better and easier for the projects to take loans from bank markets initially and then later replace them by bond markets. The role of world banks in infrastructure projects is discussed and how they see to develop the countries with poor infrastructure. Calpine corporation case study also dealt with the importance of innovative structuring for obtaining better gains. Here few good points to be noted are that we cannot choose the type of financing by looking at other project but has to consider and evaluate the particular case. The advantages and disadvantages of revolving credit facility are studied.
CE11B073: The Calpine case was an example of a company growing aggressively to utilize the arbitrage opportunity provided by the more efficient Combined-Cycle Gas Fired power plant. The company wanted to construct multiple such power plants and gain market dominance for which it needed huge amounts of funding.
ReplyDeleteFor financing this project, Calpine couldn't use Corporate Finance as it would be riskier because of the possibility of negative arbitrage and volatility of the market (the company had low debt rating). Project Finance could not be done as each of the deals would take a long time.
The Revolving Credit Facility was an innovative strategy that they used. If we view construction of the n power plants as a single project, this is just like Project Finance. The SPV would borrow money for executing this project (n power plants) and the bank would be repaid only from the revenue generated by this project (the n power plants). The repayment period was generous enough to allow time to construct multiple power plants. Using this structure Calpine was able to avoid time delays that would occur if each individual plant had to be project financed separately.
CE11B071
ReplyDeleteStructuring projects module covers two case studies Chad Cameroon petroleum development and pipeline project and Calpine corporation. The case studies highlighted what constitutes to project structure. Chad Cameroon petroleum development and pipeline project highlighted asset specificity of such infrastructure projects, Chad being one of the poorest countries with politically unstable government had hope of improving the country’s economic state through this project. Cameroon benefitted from pipeline passing through it till Kirbi. Consortium of Exxon Mobil, Petronas and Chevron had showed interest in extraction of oil and its transport, the sponsors required guarantee against the political risk, here is when World Bank steps in. The major aspect of discussion was whether World Bank should back the project or not as project is structured in such a way that the sponsor receives early returns which seems to be not fair to an extent but, there were other influences of NGOs and Libya and Sudan option. This case study highlighted characteristics of infrastructure investment – bulk capital investment, delayed revenues till the pipeline is laid, cash flows spread over long term, constant operating cost, high operating margins, opportunistic behavior and asset specificity. Second case study of the Calpine Corporation which brought in new concepts of waterfall funding, cash trap account, difference between bond market and bank market, junior debt , EBIAT, asset beta etc. the project financing had three alternatives – Project Finance, Cooperate Finance and Revolving Construction facility structure the pro and cons of each alternative was discussed, in this case corporate finance seemed optimal choice as the refinancing risk is less , comparatively issuance cost is less and has lightly higher flexibility. It is faster than project financing.
CE11B072
ReplyDeleteCalpine Corporation case:
Calpine had aimed to become low-cost producer to become one of the largest profitable power generators in America. So Calpine had started its own construction company, developed an in-house maintenance group and had cut down the ineffective management costs. It had to apply cost reductions to finance functions as well to become low-cost power producer. They had three options: use project finance, use corporate finance and try a hybrid option with the elements of both project and corporate finance. With project finance, Calpine can’t control the power plants as a system and it deals with time and cost of structuring individual deals. With corporate finance, large debt might jeopardize its debt rating and equity is the most expensive capital form. The third option is to borrow money in a secured revolving credit facility which helps in financing the four plants in one transaction and can able to raise large debt.
Through this case few new concepts were introduced to us are Cash Trap Account, waterfall cash flows and debt capacity.
Project Structure essentially means the way the project is financially structured. How are the stakeholders connected? How are the benefits shared? How are the payments made? How effectively are the risks mitigated? These are the questions answered by a project structure. Project Finance indicates the creation of a special purpose vehicle solely for the project itself. It approaches the bond markets and equity markets. And the stakeholders (lenders and equity holders) have recourse only to the project cash-flows. In the case of Chad- Cameroon, the way the project is structured enables the private player the advantage of early high cash flows. This has the risk of players exiting the project after they have made their money. In Calpine case the revolving credit facility is the new project structure proposed which enabled the project company to availability of one billion dollars loan, every time after the previous loan is paid. In this model the number of plants in the future is unknown and it considered to as risk in other project structures. But in revolving credit facility it does not depend on the number of plants , thereby eliminating that element of risk. This is to show how project structuring helps in eliminating the risks. Also the repayment was quite favourable, as it allowed enough time for construction. The Calpine Construction Finance Co. is the SPV(project finance) that takes care of the a set of power plants(corporate finance).
ReplyDeleteCE11B045, Pooja Battagani
ReplyDeleteWe came to know about structuring of projects through two case studies – Chad Cameroon and Calpine. In the former one, we saw two types of financing in one project : Upstream Operations based on Corporate Finance and Downstream Operations based on Project Finance. From the table given in Exhibit 4-4 A on Project financing and Cash flows, we observe the following:
• Large upfront investment is needed.
• Inflows occur only after substantial capital expenditure.
• Revenues are spread over long period of time.
• Operating costs are fairly constant and does not vary with the outflow.
• The operation margins = revenue – operating costs, are high which means debt and interests can be met readily.
• In the first 10 years, Exxon gets a high return of 83.5% which leaves with the fear that there is a possibility that Exxon may exit the project in near future after obtaining sufficient return.
In the Calpine Case Study, we saw the emergence of Merchant Power Plants after IPP (Independent Power Project). These plants have not guarantee of revenues as there is no power purchase agreement. Calpine uses project financing to improve their credit rating by getting surplus return. As discussed in class, out of the two options (i) Higher issuance + Lower carrying cost and (ii) Lower issuance and higher carrying cost, Calpine should choose the latter as issuance cost won’t change much in the future but there is always a chance that the credit rating will improve if Calpine performs well which will decrease the carrying cost. Cost, flexibility, time, feasibility and refinancing risk are some of the parameters that will decide which mode of financing to choose (Corporate, Project finance, Revolving Credit Facility)
Zubin Nayak MS14S018
ReplyDeleteWe learnt the various characteristics of Project Finance such as-
• Large upfront costs (Chad-Cameron case shows that many large companies were brought in for the project)
• Inflows only after substantial capital expenditure (around 2 years of time is required for setting up the projects and unlike other projects, revenue generation starts only after the project is complete)
• Revenues spread over long periods (typical power plants function for 30 years, as in Calpine case)
• Fixed (and generally low) operating costs
• High operating margins once steady state is achieved (High operating margins for Exxon Mobil etc.)
• Asset specificity (and how to avoid opportunistic behaviour of governments or regulators, which is demonstrated by bringing in World Bank and IFc in Chad- Cameroon case)
We learnt how projects are structured in unique ways in each case to exploit the advantages and to minimise the risk. Exxon-Mobil, the largest sponsor of Chad-Cameroon project brought in World Bank, IFC, Govt. of Chad and Cameroon to contain the risks. Calpine is mulling over the various options its has to finance its expansion and is trying to find the best match for its specific plans. Thus proper structuring of projects is critical to the success of a project.
Project financing model helps in creating Project models which can mitigate risks effectively. The Chad Cameroon case study was a good example for this. The Oil companies insisted on International agency funding for the project and divided the whole project as parts coming under individual SPVs with due share of equity for the govt: ,mainly in the pipeline segment. This can mitigate the large political risk existing in Chad and Cameroon. The project was so structured so that the equity investment by govt: will ensure governmenta cooperation throughout the project and the revenue sharing ensured that the companies could obtain the larger part of their investments in the initial few years. Since for such projects level of risk is higher when looking to a longer term especially in unstable nations. Hence efficient project structuring was successful in eliminating most of the risks for Companies. But it was unfair for the nations as structure made the govt: to recover their investments mostly in the later periods of the project life. This structure clear shifts a lot of risk to the govt: as now there is a high chance that the companies can quit after recovering most of their investment and leave the govt: as the loser. This case also proves how complexity in project structure helps the best person in the room to shift a project to his best advantage from a totally opposite scenario. This also indicates importance of project structuring in creating seemingly impossible and high risk projects.
ReplyDeleteThe Calpine case study showed the additional opportunities for growth with newer models of financing. The possibility of obtaining financing from banks across the world and modeling it to suit the interest of both the company and investors is a good example how project structuring and flexible project finance models can promote huge dreams of smaller companies with high capacity of growth and efficient leadership. Calpine, with its then financial capacity would have been never able to finance such a huge growth strategy without such efficient project finance structures.