International Journal of Economics, Finance and Management Sciences

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Evaluating a Project Finance SPV: Combining Operating Leverage with Debt Service, Shadow Dividends and Discounted Cash Flows

Received: 10 December 2012    Accepted:     Published: 20 February 2013
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Abstract

Project finance (PF) investments have consistently grown in the last years, especially if they concern infrastructural Public – Private Partnerships. PF is a long termed and capital intensive investment, guaranteed by expected cash flows, rather than the assets of the project sponsor. Private entities, normally created as ad hoc Special Purpose Vehicles, are typically highly leveraged with non-recourse loans. Since the shareholders may be likely to sell off their stake well before the expiring date of the concession, a professional evaluation of the SPV at different stages of the project’s life seems increasingly important. Innovative considerations about the impact of cash generating EBITDA are linked to operating leverage changes, following continuous remixing of fixed and variable costs, Debt service and shadow dividends payout are also critically investigated, analyzing their impact on leverage, risk and valuation. Fair appraisals fuel and keep alive a still infant secondary market, where investment funds and private equity intermediaries start having an active role. Being PF a cash flow based investment, DCF evaluation techniques are generally used; even if the method may seem straightforward, several awkward factors interact - and sensitivity to different parameters, such as inflation or interest rates, greatly matters. To the extent that it can be professionally managed by specialized agents, risk sharing or transmission is not a zero sum game, so positively affecting both the equity and the enterprise value.

DOI 10.11648/j.ijefm.20130101.12
Published in International Journal of Economics, Finance and Management Sciences (Volume 1, Issue 1, February 2013)
Page(s) 9-20
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Infrastructural Investments, PPP, Leverage, EBITDA, Liquidity, Business Plan, Subordinated Debt, Risk Matrix, Cost Of Capital, Secondary Market

References
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[3] McKENZIE R., (2008), Strategies to Improve Value for Money in Financing Public Private Partnership, Public Infrastructure Bulletin, vol. 1: Iss. 7, Article 2.
[4] Damodaran A., (2006) Valuation approaches and metrics: a survey of the theory and evidence. Working paper (November).www.stern.nyu.edu/~adamodar/pdfiles/papers/valuesurvey.pdf.
[5] MARTY F., VOISIN A., (2007), Partnership contracts, project finance and information asymmetries: from competition for the contract to competition within the contract?, www.oecd.org/dataoecd/32/13/41767913.pdf.
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[7] MAGNI C.A., Velez-Pareja I., (2009), Potential Dividends versus Actual Cash Flows in Firm Valuation. Journal of Applied Finance, Vol. 15, No. 7, pp. 51-66.
[8] FARRELL L.M., (2003), Principal-agency risk in project finance, International Journal of Project Management, 21, 547-561.
[9] LELAND H., PYLE H., (1977), Informational Asymmetries, Financial Structure, and Financial Intermediation, Journal of Finance, Vol. 32, No. 2, May: 371-387.
[10] SORGE M., GADANECZ B., (2004), The Term Structure of Credit Spreads in Project Finance, Bank for International Settlements (BIS), Working Paper, No. 159, August.
[11] Borgonovo E., Peccati L., Gatti S., (2010), What Drives Value Creation in Investment Projects? An Application of Sensitivity Analysis to Project Finance Transactions European Journal of Operational Research, Volume 205, Issue 1, August 2010, Pages 227-236.
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[17] ESTY B.C., (2002), Returns on Project-Financed Investments: Evolution and Managerial Implications, Journal of Applied Corporate Finance, Spring, pp. 71-86.
[18] MORO VISCONTI R., (2012), Inflation Risk Management in Project Finance Investments, International Journal of Finance and Accounting, vol. 1, n. 6, November.
[19] THAM J., Velez-Pareja I., (2004), Top 9 (Unnecessary and Avoidable) Mistakes in Cash Flow Valuation (January 29). http://ssrn.com/abstract=496083.
[20] Cheremushkin S.V., (2011), How to Avoid Mistakes n Valuation: Guidelines for Practitioners. http://ssrn.com/abstract=1785050.
[21] Fernández P., (2007),Valuing companies by cash flow discounting: ten methods and nine theories, Managerial Finance, Vol. 33 Iss 11.
[22] Marafie F. A., (2011), Most Common Errors When Valuing a Business. http://ssrn.com/abstract=1851768.
[23] Garvin M.J., Cheah, C.Y.J. (2004) Valuation Techniques for Infrastructure Investment Decisions. Construction Management and Economics, Vol. 22, No. 4, pp. 373-383.
[24] Bitsch F., Buchner A., Kaserer, C., (2010), Risk, Return and Cash Flow Characteristics of Infrastructure Fund Investments. EIB Papers, Vol. 15, No. 1, pp. 106-136, http://ssrn.com/abstract=1992961.
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Author Information
  • Dept. of Business Management, Università Cattolica del Sacro Cuore, Milan, Italy

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  • APA Style

    Roberto Moro Visconti. (2013). Evaluating a Project Finance SPV: Combining Operating Leverage with Debt Service, Shadow Dividends and Discounted Cash Flows. International Journal of Economics, Finance and Management Sciences, 1(1), 9-20. https://doi.org/10.11648/j.ijefm.20130101.12

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    ACS Style

    Roberto Moro Visconti. Evaluating a Project Finance SPV: Combining Operating Leverage with Debt Service, Shadow Dividends and Discounted Cash Flows. Int. J. Econ. Finance Manag. Sci. 2013, 1(1), 9-20. doi: 10.11648/j.ijefm.20130101.12

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    AMA Style

    Roberto Moro Visconti. Evaluating a Project Finance SPV: Combining Operating Leverage with Debt Service, Shadow Dividends and Discounted Cash Flows. Int J Econ Finance Manag Sci. 2013;1(1):9-20. doi: 10.11648/j.ijefm.20130101.12

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  • @article{10.11648/j.ijefm.20130101.12,
      author = {Roberto Moro Visconti},
      title = {Evaluating a Project Finance SPV: Combining Operating Leverage with Debt Service, Shadow Dividends and Discounted Cash Flows},
      journal = {International Journal of Economics, Finance and Management Sciences},
      volume = {1},
      number = {1},
      pages = {9-20},
      doi = {10.11648/j.ijefm.20130101.12},
      url = {https://doi.org/10.11648/j.ijefm.20130101.12},
      eprint = {https://download.sciencepg.com/pdf/10.11648.j.ijefm.20130101.12},
      abstract = {Project finance (PF) investments have consistently grown in the last years, especially if they concern infrastructural Public – Private Partnerships. PF is a long termed and capital intensive investment, guaranteed by expected cash flows, rather than the assets of the project sponsor. Private entities, normally created as ad hoc Special Purpose Vehicles, are typically highly leveraged with non-recourse loans. Since the shareholders may be likely to sell off their stake well before the expiring date of the concession, a professional evaluation of the SPV at different stages of the project’s life seems increasingly important. Innovative considerations about the impact of cash generating EBITDA are linked to operating leverage changes, following continuous remixing of fixed and variable costs, Debt service and shadow dividends payout are also critically investigated, analyzing their impact on leverage, risk and valuation. Fair appraisals fuel and keep alive a still infant secondary market, where investment funds and private equity intermediaries start having an active role. Being PF a cash flow based investment, DCF evaluation techniques are generally used; even if the method may seem straightforward, several awkward factors interact - and sensitivity to different parameters, such as inflation or interest rates, greatly matters. To the extent that it can be professionally managed by specialized agents, risk sharing or transmission is not a zero sum game, so positively affecting both the equity and the enterprise value.},
     year = {2013}
    }
    

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    AB  - Project finance (PF) investments have consistently grown in the last years, especially if they concern infrastructural Public – Private Partnerships. PF is a long termed and capital intensive investment, guaranteed by expected cash flows, rather than the assets of the project sponsor. Private entities, normally created as ad hoc Special Purpose Vehicles, are typically highly leveraged with non-recourse loans. Since the shareholders may be likely to sell off their stake well before the expiring date of the concession, a professional evaluation of the SPV at different stages of the project’s life seems increasingly important. Innovative considerations about the impact of cash generating EBITDA are linked to operating leverage changes, following continuous remixing of fixed and variable costs, Debt service and shadow dividends payout are also critically investigated, analyzing their impact on leverage, risk and valuation. Fair appraisals fuel and keep alive a still infant secondary market, where investment funds and private equity intermediaries start having an active role. Being PF a cash flow based investment, DCF evaluation techniques are generally used; even if the method may seem straightforward, several awkward factors interact - and sensitivity to different parameters, such as inflation or interest rates, greatly matters. To the extent that it can be professionally managed by specialized agents, risk sharing or transmission is not a zero sum game, so positively affecting both the equity and the enterprise value.
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