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

Roberto Moro Visconti

doi:doi:10.11648/j.ijefm.20130101.12

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

Roberto Moro Visconti

Published in International Journal of Economics, Finance and Management Sciences (Volume 1, Issue 1)

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.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 1, Issue 1)
DOI	10.11648/j.ijefm.20130101.12
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), 2013. 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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[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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[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.
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[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.
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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://article.sciencepublishinggroup.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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TY  - JOUR
T1  - Evaluating a Project Finance SPV: Combining Operating Leverage with Debt Service, Shadow Dividends and Discounted Cash Flows
AU  - Roberto Moro Visconti
Y1  - 2013/02/20
PY  - 2013
N1  - https://doi.org/10.11648/j.ijefm.20130101.12
DO  - 10.11648/j.ijefm.20130101.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 9
EP  - 20
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20130101.12
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.
VL  - 1
IS  - 1
ER  -

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Author Information

Roberto Moro Visconti

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://article.sciencepublishinggroup.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}
}

Copy | Download

TY  - JOUR
T1  - Evaluating a Project Finance SPV: Combining Operating Leverage with Debt Service, Shadow Dividends and Discounted Cash Flows
AU  - Roberto Moro Visconti
Y1  - 2013/02/20
PY  - 2013
N1  - https://doi.org/10.11648/j.ijefm.20130101.12
DO  - 10.11648/j.ijefm.20130101.12
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 9
EP  - 20
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20130101.12
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.
VL  - 1
IS  - 1
ER  -

Copy | Download