Project Financing and the International Financial Markets

by Buljevich, Esteban C.; Park, Yoon S.

• ISBN13: 9780792385240
• ISBN10: 0792385241
• eBook ISBN(s): 9780585315614
• Format: Hardcover
• Copyright: 1999-06-01
• Publisher: Kluwer Academic Pub
• More Book Details
• Purchase Benefits

Summary

Since the 1970s, the practice of financing major private and public sector capital-intensive projects has shifted to an ever-greater reliance on private funding sources, as opposed to direct financing through the issuance of corporate or government bonds. In the 1990s, these financing practices have undergone further changes with the increasing globalization of capital markets, the growth of derivative instruments, and the rapid increase in information technology that enhances cash-management practices. Today's project financing market is increasingly using sophisticated capital market, bank and agency financing mechanisms as well as using derivative instruments for asset and liability management. Thus, financial market innovations are bringing the once separate fields of project financing and international finance more closely together. This is the first book to treat both topics as an interrelated whole, for contemporary project financing cannot be fully understood without a good working knowledge of the international financial markets that have developed the various financing techniques and funding sources being used. The book provides an in-depth description of cross-border project financing as a technique for financing capital-intensive projects, as well as an overview of certain financing and derivative instruments currently available in the global financial markets. The first part of the book provides an overview of certain funding and derivative instruments currently used in the international financial markets, including a general overview of financial innovations that have occurred in recent decades. Topics covered include an introduction to the syndicated Euro-credit market; an overview of various marketable debt securities actively used in the international financial markets; an introduction to depositary receipt as an innovative way of raising cross-border equity capital; an elaboration of the derivative instruments most commonly used in the project financing arena, including interest rate, currency and commodity swaps; and finally an overview of banks' off-balance sheet activities as a critical driving force for the participation of banks in the international financial and derivative markets. The second part of the book provides an in-depth analysis of project financing that concentrates on the financier's perspective. Topics covered include a general overview of the project financing industry; a step-by-step description of a typical cross-border project finance transaction; a description of the main characteristics and advantages of project financing as opposed to more traditional corporate lending practices; an overview of appraisal techniques for assessing project financing; a comprehensive analysis of the different risk management techniques used in project financing for reducing, distributing and hedging risks; and a brief overview of certain limited-resource financing schemes. The book includes a special focus on the various stages of the risk management process for project financing, elaborating on the different stages of risk identification, risk assessment, risk reduction, risk distribution and hedging and insurance. The authors also provide a comprehensive glossary of terms relating to international finance and project financing. This book will fulfill the need for an essential text on project financing as well as a professional reference guide.

Table of Contents

Acronyms	xi
About the Authors	xv
Introduction	xvii
Overview of Financial Innovations in the International Financial Markets	1	(18)
Financial Innovations and their Implications	4	(10)
Classification of Financial Innovations	14	(1)
Types of Financial Transactions	15	(4)
Syndicated Eurocredit Loans	19	(16)
The Mandate Process	20	(1)
Marketing a Syndicated Loan	21	(3)
Syndication Documents	24	(1)
Publicity	25	(1)
Syndicated Loan Characteristics	26	(4)
Servicing a Syndicated Loan	30	(1)
Problems in the Syndicated Loan Market	31	(4)
Marketable Debt Securities in the International Financial Markets	35	(20)
Commercial Paper, Bonds and Notes	35	(17)
Government Obligations	52	(1)
Bank Guarantees in Support of Debt Securities	53	(2)
Depositary Receipts	55	(8)
American Depositary Receipts (ADRs)	56	(4)
Rule 144A ADRs (RADRs)	60	(1)
Global Depositary Receipts (GDRs)	61	(2)
Interest Rate, Currency and Commodity Derivatives	63	(14)
Interest Rate Swaps	63	(5)
Other Interest Rate Derivatives	68	(1)
Currency Swaps (or Cross-currency Long-term Debt Swaps)	69	(4)
Commodity Swaps	73	(1)
Bank Guarantees in Support of Swap Transactions	74	(3)
Off-balance Sheet Activities of Commercial Banks	77	(10)
Off-balance Sheet Activities of Commercial Banks	77	(3)
Risk-based Capital Adequacy Guidelines of the Basle Committee	80	(3)
Bank Guarantees	83	(1)
Categorization of Bank Guarantees	83	(4)
What is Project Financing?	87	(6)
Overview of Project Financing	87	(1)
The Project Finance Technique	88	(5)
Description of a Project Finance Transaction	93	(28)
Project	93	(1)
Concession and Project Company	94	(1)
Sponsors	94	(1)
Project Studies	95	(1)
Project Advisors	96	(1)
Information Memorandum	97	(1)
Project Site	97	(1)
Permits and Authorizations	97	(1)
Project Contracts	98	(1)
Off-take Agreement	99	(1)
Supply Agreements	100	(1)
Construction Contract	101	(2)
Operating and Maintenance Agreement	103	(1)
Legal Framework	104	(1)
Equity Financing	104	(2)
Project Completion	106	(2)
Debt Financing	108	(3)
Security Agreements	111	(3)
Intercreditor Agreements	114	(7)
Advantages and Characteristics of Project Financing	121	(10)
Advantages of Project Financing	121	(4)
Disadvantages of Project Financing	125	(1)
Characteristics of Project Financing	125	(6)
Appraisal Techniques in Project Financing	131	(12)
Pro Forma Financial Statement Analysis	131	(2)
Financial Ratios	133	(5)
Project Cash Flows Analysis	138	(5)
Risk Identification and Risk Assessment in Project Financing	143	(34)
Risk Identification and Risk Assessment	144	(1)
Commercial and Financial Risks	145	(13)
Political Risks	158	(5)
Force Majeure	163	(3)
Other Risks	166	(11)
Risk Management Techniques in Project Financing	177	(38)
Risk Reduction	177	(5)
Risk Spreading	182	(16)
Hedging and Insurance	198	(8)
Allocation of Risks Among Project Participants	206	(4)
Risk Allocation	210	(5)
Limited-recourse Structures	215	(8)
BOT and BOO Schemes	215	(4)
BLT and LOT Schemes	219	(1)
Lease Financing Techniques	220	(3)
Glossary of Terms	223	(58)
Bibliography	281	(14)
Index	295