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Project Finance and Credit Risk Management

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Project Finance and. Credit Risk Management. Project Finance Overview ... Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008 ... – PowerPoint PPT presentation

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Title: Project Finance and Credit Risk Management


1
Project Finance and Credit Risk Management
2
Table of Contents
  • Project Finance Overview
  • Credit Risks in Project Finance
  • Credit Risk Management (Financial Risks)
  • Cash Flow Analysis I (NPV and IRR)
  • Cash Flow Analysis II (Individual Cash Flows)
  • Stress Testing/Simulation
  • Credit Risk Management (Political Risks)

3
1. Project Finance Overview
4
Basels Definition of PF (in short)
  • A simple cash-flow stream
  • The value of PF relies on a simple cash-flow
    stream generated by a single project and the
    collateral value of the project assets the
    source of the cash-flow may be a single buyer or
    consumers.
  • Non- or limited-recourse
  • An independent SPE is created to hold the project
    assets and to integrate all legal contracts in an
    effective and efficient manner for funding,
    building and operating a single purpose project.
    SPE is owned by one or a few sponsors and it is
    highly leveraged.
  • Risk allocation
  • PF is used for large, complex, and expensive
    industrial facilities such as natural resources
    and infrastructure sectors, which involve a
    series of legal contracts in a vertical chain
    from input supplier to output purchaser.

Based on International Convergence of Capital
Management and Capital Standards, BIS, 2006, para
221,222
5
Why PF Structure? Sponsors Motivation
  • Risk mitigation/Debt capacity
  • By isolating the asset in a standalone project
    company, project finance reduces the possibility
    of risk contamination, the phenomenon whereby a
    failing asset drags an otherwise healthy
    sponsoring firm into distress.
  • The sponsor can preserve corporate debt capacity.
  • To create asset specific governance structure
  • Separate legal incorporation, which assumes a
    specific project and few growth options, reduces
    both the cost of monitoring managerial actions
    and assessing performance, and wasteful
    expenditures and sub-optimal reinvestment.
  • Deterrent against strategic behavior by the third
    parties
  • Sponsor can involve the critical parties for the
    project, including the public sector, as
    shareholders to prevent future conflict.
  • By involving international banks and multilateral
    agencies whose interest is solely in cash-flow
    maximization by the project, the sponsor may
    prevent harmful action by the host government.

Based on The Economic Motivations for Using
Project Finance, Benjamin C. Esty, 2003
6
PF vs. Corporate Finance
  • Project Finance
  • Limited or non-recourse
  • Simple cash-flow structure produced from one
    independent waste asset
  • High-leverage at beginning, but getting lower
    toward the end of the debt repayment
  • Relatively a few layers of debt and equity
    structure (simple ownership)
  • Applied to projects attaining a scale of economy
  • Corporate Finance
  • Full recourse
  • Complicated cash-flow structure produced from a
    set of various, replaceable profit making
    projects
  • Leverage depends on a companys target capital
    structure
  • Various layers of debt and equity structure
    (complicated ownership)
  • Applied to all profit making business types

7
Typical Structure of Conventional PF
Sponsors
Central/local Government
Shareholders Agreement
License/permit
Equity
Lenders
Concession Authority
Multilateral/bilateral agencies
Loan Agreement
Concession Agreement
Debt
Insurers
Insurance
Contractors
Equipment suppliers
Construction Agreement
Input supplier
Supply agreement
Off-take agreement
Off-take purchaser
Project company (SPE)
Power/utility
Operation/maintenance Agreement
Operator
8
2. Credit Risks in Project Finance
9
Project Finance Credit Risks Overview
Force Majeure Events
Political Risks
Contractual Risks
Financial Risks
Natural Disaster
Commercial Risks
Creeping Expropriation
War Civil Disturbances
Market Risks
Civil Movements
  • Fire
  • Flooding
  • Earthquake
  • Volcano
  • Disease
  • Strike
  • Insurrection
  • Terrorism
  • War
  • Corruption
  • Legal/regulatory
  • -irregularities
  • License/Permit
  • Concession
  • Taxes
  • Equity-holding
  • Currency
  • -inconvertibility
  • Expatriation
  • Preemption/priority
  • Breach of contract
  • Foreign worker limitation
  • Law enforcement
  • Construction
  • Facility site
  • Equipment
  • Technology
  • Off-take
  • Input
  • Operation
  • Utility
  • Collateral
  • Mineral reserves
  • Reporting accuracy
  • Interest rate
  • Exchange rate
  • Inflation rate
  • Labor cost
  • Product market
  • Input market
  • Salvage cost
  • Environment
  • Human rights
  • CSR
  • Religion
  • Nationalism
  • Globalization

Outright Expropriation
  • Expropriation
  • Confiscation
  • Nationalization

10
3. Credit Risk Management (Financial Risks)
11
3.1 Cash Flow Analysis I (NPV and IRR)
12
Net Present Value (NPV) I
Financial Agreement (Closing)
t 20
t 30
t 40

Free cash flow
t 5
t 10
Year
Salvage value
Sank costs
Sank cost does not affect cash flow analysis
because it is an existing fact regardless of the
investment decision (it is not incremental costs).
Cash out flow
t 0
Example
t 1
- CF2
Present value of cash out flow at t2
PV
t 2
(1 r )
2
CF10
Present value of cash in flow at t10
PV
(1 r )
10
Present Value
13
Net Present Value (NPV) II
PV0 - CF0

Present value of cash out flow at t0
Negative value because they are cash out flow
?
- CF2
Present value of cash out flow at t2
PV2
(1 r)
2
?
?
?
CF10
Present value of cash in flow at t10
PV10
Positive value because they are cash in flow
(1 r)
10
?
?
Net of all present value of cash out flow and all
present value of cash in flow is
?
NPV PV0 PV1 PV2 PV3 ??? PV42
- CF2
- CF1
CF10
CF42
- CF0
??? ???
(1 r )
(1 r )
10
(1 r )
(1 r )
1
2
42
42
CFt
S
As long as this value is positive, the project
will produce more cash than necessary to repay
debt and dividend.
(1 r)
t
t 0
14
Net Present Value (NPV) III
  • Implication
  • Positive NPV the project will generate more cash
    than the necessary amount to repay debt to banks
    and deliver dividend to shareholders, the excess
    cash solely to the projects shareholders.
  • Zero NPV the project will generate exactly the
    necessarily amount of cash to repay debt to the
    banks and deliver dividend to shareholders.
  • Negative NPV the project cannot generate cash to
    repay debt to banks and deliver dividend to
    shareholders.
  • Weak point of NPV is that it produces only
    absolute values.
  • 1 million investment and 1 thousand investment
    could, theoretically, produce the same NPV
    values.

Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
15
Internal Rate of Return (IRR)
  • Method
  • IRR is defined as the discount rate that assumes
    NPV is equal to zero.
  • Implication
  • IRR is useful when investors assess the project
    against their hurdle rate, which is a cost of
    capital.
  • IRR gt Hurdle Rate the project will produce more
    cash than the necessary amount to repay debt and
    deliver dividend to shareholders.
  • IRR Hurdle Rate the project will produce the
    exact amount of cash to compromise investors
    cost of capital.
  • Weak points of IRR
  • It applies the projects IRR to the reinvestment
    of cash in flows
  • When there are more than one change from cash
    out-flow to cash-in flow, or from cash-in flow to
    cash out-flow in the projection, the value of IRR
    are more than one calculator would simply
    indicate error

N
CFt
IRR S 0
(1 r)
t
t 0
Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
16
Modified Internal Rate of Return (MIRR) I
Financial Agreement (Closing)
Cost of capital ?

Free cash flow
Year
Sank costs
N-t
(1 r )
1
Cash out flow
(1 r )
t
? Cost of capital
Present Value
Future Value
Future value of all cash in flows
42
(1 MIRR)
Present value of all cash out flows
17
Modified Internal Rate of Return (MIRR) II
  • Method
  • MIRR is defined as the discount rate that forces
    the present value of cash in flows (CIF) to equal
    the present value of cash out flows (COF).
  • Implication
  • MIRR is better than IRR because it reinvest the
    cash-in flow by using the cost of capital which
    is more realistic. Thus, MIRR tells more accurate
    profitability of the project.
  • MIRR gt Hurdle Rate the project will produce more
    cash than the necessary amount to repay debt and
    deliver dividend to shareholders.
  • MIRR is better than IRR because it allows more
    than one changes in plus and minus signs in cash
    flow projection.

N
S
N - t
CIFt (1 r )
N
COFt
S
t 0
(1 r )
N
t
(1 MIRR)
t 0
FV of cash in flows
PV of cash out flows

(1 MIRR)
N
Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
18
Profitability Index (PI)
  • Method
  • PI is another way of using NPV by dividing PV of
    future cash flow by initial investment.
  • Implication
  • PI tells the relative profitability of the
    project by indicating the value of the future
    cash flows par dollar of initial investment. When
    PI gt 1, the project should be accepted. When PI
    1, this basically means NPV 0 and MIRR Hurdle
    Rate.

N
S
CFt
Generally
(1 r)
t
PV of future cash flows
t 1
PI

Initial investment
CF0
42
S
CFt
For the example cash flow projection
PV of future cash flows
(1 r )
t
t 4
PI

Initial investment
3
CFt
S
(1 r )
t
t 0
Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
19
Comparing two projects with NPV and IRR
Project A
Project B
100
500
100
300
400
600
400
300
t
t
-1000
-1000
Cost of capital 10
Cost of capital 10
NPV 78.82 IRR 14.5 MIRR 12.1 PI
1.08
NPV 49.18 IRR 11.8 MIRR 11.3 PI
1.05
NPV
  • A conflict between NPV and IRR when
  • Project size differences exist
  • Timing differences exist
  • below crossover rate.

400
Project B
300
Crossover rate
200
Project A
100
Take NPV rather than IRR. The logic is That NPV
selects the project that adds most to
shareholders wealth.
78.82
49.18
0
r
5
10
15
-100
7.2
11.8
14.5
Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
20
Other Important Indicators
  • Debt service coverage ratio
  • Loan life coverage ratio
  • Project life coverage ratio
  • Debt-to-equity ratio

Annual FCF

Annual debt service (principal and interest
payments)
NPV of FCF during the life of the debt

Outstanding debt
NPV of FCF for the entire project life

Outstanding debt
Outstanding debt

Outstanding equity
21
Issues on Cost of Capital I
  • Decreasing Debt/Equity Ratio
  • For calculating NPV for a project within a
    company or for a companys valuation, generally
    WACC (weighted average cost of capital) is used.
  • In case of project finance the outstanding debt
    constantly declines and debt/equity ratio keeps
    changing throughout the project life.

CFn
CF2
CF1
NPVC - CF0
???
(1 WACC)
(1 WACC)
(1 WACC)
1
2
n
CFn
CF2
CF1
NPVP1 - CF0
???
(1 WACCn)
(1 WACC2)
(1 WACC1)
1
2
n
in which weight of debt is constantly
adjusted WACC (weight debt? x cost debt)(1 T)
(weight capital? x cost equity)
NOPAT2 tKDD2
NOPAT1 tKDD1
or NPVP2 - CF0
???

1 (Rf ßa x Rp)
1 (Rf ßa x Rp)
1
2
NOPAT Net Operating Profit After Tax, t tax
rate, KD debt cost, D debt outstanding, Rf
risk free rate, ßa asset beta, Rp risk premium
Tax shield adjustment
Based on Capital Cash Flows A Simple Approach
to Valuing Risky Cash Flows, Richard S. Ruback,
2000
22
Issues on Cost of Capital II
  • Reliability of CAPM in Project Finance Situation
  • Both NPVP1 and NPVP2 in the previous slide
    involve the concept of CAPM (capital asset
    pricing model) to get debt, equity and asset
    beta, which would not work appropriately in case
    of project finance for several reasons
  • A country where project is located may not have
    integrated/efficient market
  • Data would be not available for market risk
    premium
  • An ideal instrument represents the risk free rate
    would not be available
  • CAPM may not able to incorporate all risks
    associated with the project
  • CAPM does not consider asymmetric down side risks
  • Required return on debt may different between
    construction and operating periods
  • What if there is single purchaser located in
    other country?
  • What to do?

Based on Project Finance, Aditya Agarwal and
Sandeep Kaul
23
3.2 Cash Flow Analysis II (Individual Cash Flows)
24
Analysis of Individual Cash Flows
Free Cash Flow (FCF)
Year
FCF used for NPV (IRR) analysis
Sales revenue
Year
Anatomy of FCF for project finance
Input cost
Operating cost
Construciton costs
Taxes
Net investment (in maintenance)
25
Construction I
  • Construction contracts
  • Fixed price contract (high premium/low risk,
    payment based on progress)
  • Turn-key contract
  • The contractor accepts full responsibility for
    delivering a fully operational facility on a
    date-certain, fixed price basis.
  • EPC contract (engineering, procurement, and
    construction contract)
  • Cost plus fee contract (low premium/high risk,
    frequent payments)
  • Cost plus fee contract with maximum price and
    incentive fee

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
26
Construction II
  • Major risks I
  • Increase in construction cost (cost over-run)
  • Unavailability of sufficient funds to complete
    construction
  • Inability to the project company to pay increased
    debt service during operation, even if funded by
    debt
  • Risk mitigation
  • Turn-key contract
  • Contractual undertakingsinfusion of additional
    equity, standby equity participants, contingency
    tranche in construction loan, standby cost
    over-run funding agreements
  • Escrow funds, contingency account
  • Delay in completion
  • Increase in construction costs and in debt
    service costs
  • Delay in the scheduled flow of revenue to cover
    debt service and expenses
  • Breach of project contracts, such as fuel supply
    or off-take
  • Risk mitigation
  • Turn-key contract
  • Stated milestones tied to construction loan
    contract

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
27
Construction III
  • Major risks II
  • Project performance at less guaranteed levels
  • Breach of off-take contract/decrease in project
    revenue
  • Increase in maintenance costs and input/utility
    costs
  • Inability to the project company to repay debt
  • Risk mitigation
  • Performance liquidated damage to cover the loss
  • Third party guarantees such as letter of credit
    or performance bond (payment bond), when
    financially weak contractors
  • Bid bond/warranty bond/retention bond
  • Other risks
  • Site acquisition and construction related
    facilities
  • Equipment, building material, and utility supply
  • Labor/environmental issues
  • Force majeure risks
  • Risk mitigation
  • All risk contractors riks insurance

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
28
Off-take Purchase I
  • Off-take agreements
  • Take-or-pay contract (a form of unconditional
    guarantee)
  • the purchaser is required to pay for a certain
    amount (fixed cost), even the product is not
    delivered. The rest of the amount (variable cost)
    will be paid if the purchaser wants to buy.
  • Take-and-pay (a form of conditional guarantee)
  • the purchaser required to pay for a certain
    amount (fixed cost) for the product delivered,
    when the product meets the contract quality
    requirements.
  • Long-term sales agreements (obligation to
    purchase)
  • typically one- to five-year agreement for the
    purchase and sale of specified quantities of the
    projects output. The purchaser has the
    obligation to purchase the contract quantity only
    if it is produced and delivered, and meet the
    contract quality requirements.
  • Off-take purchasers financial strength
  • Market for product or service (in the long run)

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
29
Off-take Purchase II
  • Merchant project (Merchant facility)
  • Merchant facility is a project finance without
    off-take contracts
  • Cash flow fully relies on the market for project
    output and forecasts of future market conditions
    (revealed to market risks).
  • The analysis of market risk is similar to that
    used in any business model (price, supply and
    demand).
  • Risk mitigation
  • Linking inputs and outputs
  • Reserve funds
  • Cash calls
  • Subordination of project costs to debt services
  • Hedging strategies
  • The commodity supplier as project partner

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
30
Input
  • Major risks
  • Increase in input costs
  • Risk mitigation
  • Supply-or-pay contract
  • Fixed amount contract
  • Requirements contract (cap/floor)
  • Output contract
  • Subordination of project costs to debt services
  • Other issues
  • Delay in completion of transportation facilities
  • Availability of supply
  • Disruption of transportation
  • Title and risk of loss
  • Force majeure
  • Financial strength of supplier

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
31
Operation
  • Major risks
  • Increase in operating costs
  • Excessive equipment replacement and unscheduled
    maintenance
  • Poor productivity of labors, incorrect
    assumptions of required labor
  • Increase in utility costs
  • Risk mitigation
  • Performance guarantees (liquidated damage)
  • Fixed price operation and maintenance contract
    (very rare)
  • Cost plus fee operation and maintenance contract
  • Cost plus fee contract with maximum price and
    incentive fee
  • Other risks
  • Force majeure risks
  • Risk mitigation
  • All risk operators risk insurance
  • Financial strength of the operator

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
32
Exchange/Interest/Inflation Rate
  • Currency and exchange risks
  • Loan agreement
  • Loan disbursements (construction loan and term
    loan)
  • Principal repayment and interest repayment
  • Availability of swap markets
  • All other agreement
  • Export and import of equipment, input, out-put,
    operating costs
  • Cash flow will be affected depends who takes the
    risks and covers
  • Interest rate
  • Incorrect interest rate projections can severely
    affect the ability of the project revenue to
    service debt by
  • Inflation rate
  • Risk allocation
  • Cash flow projection

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
33
Collateral I
  • The blanket lien
  • The blanket lien covers all the assets of the
    project company, including real (unmovable) and
    personal (movable), tangible and intangible.
  • Project cash flow
  • A security interest in the cash flows generated
    by the project under long-term off-take
    agreements.
  • Accomplished through a cash collateral account in
    which off-take purchaser pays all payments into
    the account established by the lenders.
  • Offshore accounts/escrow accounts
  • Ownership interests
  • Pledge of ownership interests
  • Voting trust
  • Negative pledges
  • An agreement under which the project company will
    not create, directly or indirectly, any security
    interest, lien or encumbrance in its assets for
    the benefit of any other entity.

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
34
Collateral II
  • Personal (movable) property
  • Intangible assets
  • Permits, licenses and concessions
  • Contracts
  • Insurance proceeds
  • Surety bonds
  • Guarantees
  • Liquidated damages
  • Political risk insurance
  • Accounts
  • Disbursement agreement

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
35
Collateral III
  • Review the contracts to verify that they are each
    assignable under the countrys law.
  • In the event of a foreclosure, the contracts will
    only have value to the lender if they can be
    assumed by the lender and later assigned to a
    purchaser of the project.
  • Other issues
  • Types of liens allowed
  • Local formalities
  • Denomination of lien in local currency
  • Priority of lien (perfection)
  • Enforcement
  • Foreclosure

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
36
Equity and Dividneds
  • Timing and certainty of equity contribution
  • A part of equity contributions to the project
    company may be planned after the financial
    closing. Some funds may be injected with
    construction draw-downs, or await investment
    until project completion.
  • Risk mitigation
  • Condition precedents in loan agreement
  • Covenants in loan agreement
  • Some conditions for dividend payments
  • Requirement to replenish before dividend payments
  • Reserve (contingent) account
  • Off-shore account
  • Financial covenants a financial covenant
    limiting the dividend payments to a certain level

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
37
Permit/License/Concession
  • Status
  • Permits already obtained and in full force and
    effect
  • Permits routinely and mandatorially granted on
    application and fulfillment of applicable
    criteria and that would not normally be obtained
    before construction (before loan agreement)
  • Other than above
  • Risks
  • Unable to operate/termination of project
  • Damage payments
  • Different policies between central and local
    governments
  • Permit vocation, additional permit requirements
  • Risk mitigation
  • Integrated management of all necessary permits
    apply, obtain, maintenance, renew processes

Based on The Law and Business of International
Project Finance, Scott L. Hoffman, 2001
38
3.3. Stress Testing/Simulation
39
Basics of Risk Analysis Techniques I
  • Three stages of risk analysis techniques
  • Sensitivity Analysis a linear relation between a
    cash flow factor and NPV
  • Scenario Analysis estimate probabilities of each
    individual cash flow on the basis of base-case,
    best-case, and worst-case scenario, which in turn
    provides mean and standard diviation of NPV
  • Monte-Carlo Simulation obtain expected NPV and
    standard deviation from randomly selected
    scenarios based on the probability distribution
    of each cash flow factors

40
Sensitivity Analysis I
  • Method
  • Sensitivity analysis is a risk analysis technique
    that tells how much NPV will change in response
    to given changes in one cash flow factor with
    other factors held constant.

NPV ()
NPV when unit sales price goes up by 15
Unit sales price
NPV based on the originally estimated unit sales
price
0
NPV when unit sales price goes down by 20
-5
20
15
10
5
-10
-15
-20
0
Deviation from Base-Case Value ()
Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
41
Sensitivity Analysis II
  • The slopes of the lines indicate how sensitive
    NPV is to changes in each individual cash flow.
  • Relatively small error in estimating individual
    cash flow with steeper slope leads to a large
    error in estimating projects NPV.

Unit sales price
NPV ()
Estimated values of cash flow factors
Price growth rate
Sales quantity
Original NPV value
Asset beta
0
Utility price
Input price
Operating costs
NPV breakeven analysis
Construction costs
Input price growth
-5
20
15
10
5
-10
-15
-20
0
Deviation from Base-Case Value ()
Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
42
Sensitivity Analysis III
  • Implication
  • Sensitivity analysis is a powerful technique to
    understand which factors need to be more
    accurately examined to reduce the entire credit
    risk.
  • Weak Points
  • Sensitivity analysis does not incorporate a
    concept of probability
  • It can deal with only one cash flow for each
    analysis
  • NPV Breakeven Analysis
  • NPV breakeven analysis examines a value of each
    factor which makes NPV exactly zero.

Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
43
Scenario Analysis I
  • Method
  • Scenario analysis examines a set of scenarios
    under tha assamption that each scenario occurs
    with a certain probability
  • Example 1 sales price would drop by 6 with 25
    probability for worst case scenario.
  • Example 2 operating cost would be reduced by 2
    with 25 probability for best case scenario.
  • Then obtain base-case, best-case, and worst-case
    NPV and calculate mean NPV and standard deviation
    to (roughly) estimate the magnitude of the risk
    inherent to the project.
  • Implication
  • Scenario analysis is very useful technique to
    grasp the worst case situation of the project (by
    assuming 1.0 correlation).

Based on Financial Management, Eugene F. Brigham
and Michael C. Ehrhardt, 2008
44
Scenario Analysis II
  • Simplified illustration of scenario analysis
    process

Expected NPV (mean value)
Excel Sheet
Standard Deviation of NPV
Slot in all base-, best-, and worst-case
scenarios of each cash
Base-, best-, and worst-case scenarios of each
cash flow
  • Projected NPVs on the basis of the three scenarios

Probability ()
50
FCF from base- case scenario
40
30
FCF from best- case scenario
FCF from worst- case scenario
20
10
0
NPV ()
Mean value
45
Monte Carlo Simulation
  • Simplified illustration of monte-carlo simulation
    process

NPVs probability Distribution
Expected NPV (mean value)
Standard Deviation of NPV
Probability distribution of each cash flow and
correlations between them
Randomly picking up scenarios
  • Simplified illustration of probability
    distribution of NPVs

46
4. Credit Risk Management (Political Risks)
47
Mechanism of Political Risks for PF
  • Political shift
  • Corruption
  • Violation of law
  • High profit
  • Rival company

Weaker negotiating power
Irreversible Investment
Creeping expropriation
A large standing out asset
Political interest
Easily attract peoples attention
Civil movement
Trigger
Potential foreign exploitation
War/civil disturbance
Natural resources/ infrastructure
Civil interest
Potentially high utility bills
Outright expropriation
  • Natural disaster
  • Environmental problem
  • Increased input costs
  • Inefficient operation
  • International relation

Potential environmental damage
48
Useful Documents
  • Project Fiannce Introductory Manual on Project
    Finance for Managers of PPP Projects, National
    Treasury, South Africa
  • Although this document is prepared for
    public-private partnership (PPP) managers, it
    provides a good overview of project finance
    credit analysis, by addressing the general
    structure of a project, funding alternatives,
    investor profiles, and the criteria investors
    will consider. Also, it contains good
    illustrations for cash flow analyses. (46 pages)
  • Available at http//www.finint.ase.ro/Masterate/M
    asterat_Alexandra/Bibliografie/Project_Finance_Man
    ual.pdf
  • Tools for Project Evaluation, Nathaniel Osgood,
    2004
  • Detailed and clear explanation on time value of
    money, the concept of discounting, and NPV and
    IRR methods, with cases. (41 slides)
  • Available at http//ocw.mit.edu/NR/rdonlyres/Civi
    l-and-Environmental-Engineering/1-040Spring-2004/A
    BF26C4A-8572-498D-ACE3-98D2E8AD0685/0/l3prj_eval_f
    ina2.pdf
  • Thought process during the project initiation
    pahse, H. Griesel, 2004
  • An excellent summary of project finance risks in
    the mining sector. (6 pages)
  • Available at http//www.platinum.org.za/Pt2004/Pa
    pers/237_Griesel.pdf
  • Glossary of Project Finance Terms, Foster Wyatt
    Training, 2003
  • Useful glossary for project finance. (12 pages)
  • Available at http//www.fosterwyatt.com/filesdown
    load/HNDOUT39.pdf
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