Structuring the Project finance

Submitted by: Swetha Avula Anirudh Baliyan Prince Behl Raunak Bhagwat Prachi Bhandari Mayank Bhatia
SVKM's NMIMS University

Question:
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What potential problems could arise that would prevent capital providers to earn returns on their invested capital?

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Market Risk Demand uncertainty

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Exhibit 5 Australia Demand and Supply for Capacity (Gigabits) 1999E Existing Capacity Southern Cross Cable SEA-ME-WE3 Upgrade Total Existing & Planned Capacity Forecast Demand Source: Company documents. 27 0 0 27 10 2000E 27 120 20 167 25 2001E 27 120 20 167 63 2002E 27 120 20 167 129 2003E 27 120 20 167 209 2004E 27 120 20 167 320 2005E 27 120 20 167 470

Wastage of unused capacity or excess capacity supply

by competitors Mitigation Strategy: Pre-sales capacity contracts

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Market Risk Price Volatility

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Exhibit 3 Impact of Declining Prices on the Present Value of Revenue

Annual Rate of Price Declines 0% 10% 20% 30% 40% 50%

Source: Casewriter analysis.

Cumulative Present Value of Revenue as Percent of Total 10-Year Revenue (by Year) Year 1 Year 3 Year 5 15% 21% 28% 37% 46% 55% 40% 52% 64% 75% 84% 91% 62% 73% 83% 91% 95% 98%

Year 7
79% 87% 93% 97% 99% 100%

Higher the annual price decline, lesser the time period of cash

flows generated Mitigation Strategy: Hedging strategy (Forward Contract)

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Technological Risk
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Access to cheaper and better technology Mitigation :

Co-opetation Launching the cable system quickly Upgrading the existing technology

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Completion Delays
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Due to Equipment supply delay Mitigation: Signing supply contracts, selecting credit worthy and well known suppliers

Due to unavailability of cable ships to install cables

and repeaters and for further maintenance

Mitigation: Book cable ships in advance

Due to access to landing stations, right-of-way

permits

Mitigation: Landing party agreements shared ownership with landing station owners

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Sovereign Risk : Changes in government policies Mitigation: Higher leverage from various lending institutions Hold Up Risk: Enter into long term contracts for Landing stations Operational Risk: Cable failures due to shipping,

dredging and fishing activities

Mitigation: Hiring cable ship companies with high expertise level in maintenance

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 Question :
8

What are your recommendations in terms of:

Ownership structure Capital structure Organization structure Board structure Management compensation?

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Number of sponsors in Project Finance

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Source: economic motivations for project finance (Harvard Business school)

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Proposed Ownership structure

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Sponsors/Partners Telstra AT&T Japan Telecom NTT Teleglobe

Shareholding 40% 15% 15% 20% 10%

Asset to table Major sponsor Landing Station Landing Station Landing Station + Capacity Capacity

Need to have good equity contribution to avoid Hold Up in the future

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Capital Structure in Project Finance

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Source: economic motivations for project finance (Harvard Business school)

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Capital Structure
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Total Capital Required:

Debt : 85% ($ 482 million) Equity : 15% ($ 85 million)

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Reasons for High Leverage

Limit the managerial discretion over project cash
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flow
Shorter Payback period Mitigate sovereign risk by reducing reported profits Paradox of infrastructural investment Rather than increasing returns on project, a better solution is to reduce the risk by careful structuring As sovereign risk falls, the appropriate required return falls
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Organizational Structure
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Board of Directors

Chief Executive Officer

Head of Administration Executive Manager

Chief Financial Officer

Technical Services Executive Manager

Operations Executive Manager

Head of Sales and Marketing

Finance Manager

Regional Operations Manager Australia

Regional Operations Manager Japan

Regional Operations Manager Guam

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Board Structure
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Source: economic motivations for project finance (Harvard Business school)

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Proposed Board Structure

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Partner Telstra AT&T Japan Telecom Teleglobe Lending Institution

No. of directors 2 2 2 2 1 or 2

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Proposed Compensation Structure

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Base Salary For skills and experience Executive Bonus As per performance (0% to 50%) Long term incentives Stock options or cash

rewards

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Question:
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Can Take-Over Finance be used to solve the financial

structure issue?

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Take Over Finance

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Tripartite Arrangement between Project Company Lender Financial Institution(FI) to fund long term infrastructure projects FI takes over the outstanding loan from the Lender

on a predetermined basis

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Advantages
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Project Developer Lender

Gets Finances for long term Projects Need not go and search for refinancer Asset Liability Management Frees the funds to lend to other projects Economic & Social Development Faster Infrastructure Creature

Financial Institution
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Our Take
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Thank You
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