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J. Robert Sheppard, [email protected]

704 363-9304

FINA 773 Fall 2012International Project Finance

Instructor: J. Robert Sheppard, Jr.Phone/Voice Mail: (704) 363-9304e-mail: [email protected] Hours: 4:00 pm 6:00 pm, Monday (to be held in a conference room to

be announced)

Specific Learning Objectives

The course will give students an understanding of the following topics:

(1) the fundamentals of non-recourse, project financing (structures, creditaspects, modeling)

(2) financial markets for project finance, including syndicated bank loans, capitalmarkets, export credit agencies, multilateral institutions, and the privateequity market

(3) infrastructure sectors and their business risks, as well as an appreciation ofhistorical and institutional factors that affect infrastructure development indifferent regions of the world

(4) transaction structures and the documentation used to structure individualproject financings

(5) political risk, especially as it affects infrastructure investment and financing(6) currency risk as it affects infrastructure projects(7) local currency financing (availability, limitations as a source of long-term,

fixed-rate financing), and(8) international organizations relevant to infrastructure investment and finance.

Students will learn to:

(1) analyze business opportunities for their potential to be structured as a projectfinancing

(2) analyze the risks entailed by various forms of project and project financialstructures

(3) model a project financing(4) assess alternative project financing strategies(5) understand how transactions are priced and be able to price a transaction

(within the classroom constraint of assumed market conditions)

Required Course Materials

(1) Yescombe, E. R., Principles of Project Finance, Academic Press, 2002(2) Kennedy, Robert E., InterGen and the Quezon Power Project: Building

Infrastructure in Emerging Markets, Harvard Business School Case, Product# 799057

(3) Esty, Benjamin C. and Matthew Mateo Millet, Petrolera Zuata, PetrozuataC. A., Harvard Business School Case, Product # 299012

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(4) Additional cases to be supplied by the instructor, to be available onblackboard

(5) Selected articles and papers to be supplied by the instructor, to be availableon blackboard

Course Schedule

Monday 6:00 pm 8:30 pm

(A 10 minute break will be taken beginning at approximately 7:15 pm)

Lecture Notes

Material presented by the instructor will include PowerPoint presentations.Copies of the slides will be available on blackboard.

Course Grading

Course grading will be determined based on the following elements:

Mid-term exam (one hour) 15%Class participation 20%Longer case analyses (2-3 cases) 20%Shorter cases/problem situations 15%Final exam 30%

The mid-term exam will be relatively brief and is intended to insurecomprehension of basic concepts. (If a make-up exam is necessary, it will beadministered as soon as reasonably possible after the originally scheduled timefor the exam.)

Two major written case analyses will be required. Each analysis will be limited tofive pages of text, plus exhibits (if any). There is no limit applicable to exhibits.For most weeks (except those in which a major case analysis is due) a shorterassignment will be due; these shorter assignments will consist of a brief analysisof a case or problem situation (limited to one page, plus exhibits).

Regular class participation is expected. Students will be called upon to answerquestions and to present their analyses of cases and problem situations; inaddition, they are expected to demonstrate initiative in class participation.

Grades will be based on the following scale:

A 100 90B 89 80C 79 70D 69 60F Below 60

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University of South Carolina Honor Code

It is the responsibility of every student at the University of South Carolina Columbia toadhere steadfastly to truthfulness and to avoid dishonesty, fraud, or deceit of any type inconnection with any academic program. Any student who violates this Honor Code orwho knowingly assists another to violate this Honor Code shall be subject to discipline.

This Honor Code is intended to prohibit all forms of academic dishonesty and should beinterpreted broadly to carry out that purpose. The following examples illustrate conductthat violates this Honor Code, but this list is not intended to be an exhaustive compilationof conduct prohibited by the Honor Code:

1. Giving or receiving unauthorized assistance, or attempting to give or receivesuch assistance, in connection with the performance of any academic work.

2. Unauthorized use of materials or information of any type or the unauthorized useof any electronic or mechanical device in connection with the completion of anyacademic work.

3. Access to the contents of any test or examination or the purchase, sale, or theftof any test or examination prior to its administration.

4. Use of another persons work or ideas without proper acknowledgment of source.

5. Intentional misrepresentation by word or action of any situation of fact, orintentional omission of material fact, so as to mislead any person in connectionwith any academic work (including, without limitation, the scheduling, completion,performance, or submission of any such work).

6. Offering or giving any favor or thing of value for the purpose of influencingimproperly a grade or other evaluation of a student in an academic program.

7. Conduct intended to interfere with an instructors ability to evaluate accurately astudents competency or performance in an academic program.

Whenever a student is uncertain as to whether conduct would violate this Honor Code, itis the responsibility of the student to seek clarification from the appropriate facultymember or instructor of record prior to engaging in such conduct.

Suspected violations of the honor code will be reported to the Office of AcademicIntegrity. Violations of the honor code will result in disciplinary measures.

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Course Outline:

The course will cover the following topics in the order listed below.

Week 1

Introduction and Overview of Project FinanceCase: Cogenergy (US) (a conceptual exercise, without quantitative data)Reading: Yescombe, Principles of Project Finance, pp 1 48

(Chapters 1 4)

Week 2

Basic Risk Mitigation: EPC Contracts, PPAs, and Fuel Supply AgreementsReading: Yescombe, Principles of Project Finance, pp 69 130,

(Chapter 6, much of Chapter 7), and pp 137 181 (Chapter 8)Assignment: Prepare Cogenergy construction loan calculation and model for first

10 years using lease financing

Overview of infrastructure sectors (covered in class by PowerPoint slides)

Week 3

Financial Modeling for Project Finance TransactionsReading: Yescombe, Principles of Project Finance, pp 251 282

(Chapter 12)Assignment: Prepare answers to the Problem Set posted in the Course Content

section of Blackboard

Introduction to Risks of International Projects

Week 4

Application of the Contractual Model to International ProjectsCase: MegaPower Reading: Yescombe, Principles of Project Finance, pp 203 216

(Chapter 10)Assignment: Case analysis of MegaPower, 3 pages, plus exhibits

Week 5

Syndicated Bank Finance and DocumentationCase: ElectroPublicReading: Yescombe, Principles of Project Finance, pp 183-201 and pp 283-328

Assignment:(1) With your team, fill out the bidding form and prepare to present your

proposed financing(2) Individually, prepare a one-page analysis of the case with

recommended pricing, terms, and bidding strategy; you may present

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the same terms as your team proposal or a proposal that reflects yourown views rather than the team consensus.

Week 6

Export Projects

Case: Petrozuata (Harvard case, available for electronic download at http://hbsp.harvard.edu/)

Reading: Yescombe, Principles of Project Finance, pp 49 59Assignment: Please prepare an analysis of the case, responding to the issues

raised at the end of the case, including whether you think theproposed bonds will receive an investment-grade rating, with yourrecommendations about a financing strategy that can finance theproject regardless of what rating is actually achieved for theproposed bond issue (limited to three pages of text), plus exhibits(no limit on exhibits)

Follow-up info on subsequent Petrozuata developments (presented in class)

Week 7

Mid-term Exam (first half of class)

Currency Risk and Local Capital MarketsReading: Sheppard, Capital Markets Financing for Developing-Country

Infrastructure Projects (UN Paper)Review Yescombe, Principles of Project Finance, pp 195 201

Week 8

Sources of Information about Project Finance and Infrastructure (presented in class)Currency Risk and Local Capital Markets

Reading: Sheppard, Theoretical Considerations Concerning Approaches toMitigate Foreign Exchange Risk for Developing-CountryInfrastructure ProjectsReview and read Yescombe, Principles of Project Finance, pp 183 - 215

Week 9

Multilaterals, Export Credit Agencies, Political Risk Insurance, and Carbon CreditsReading: Yescombe, Principles of Project Finance, pp 217 249 (Chapter 11)

(Review pp 203 216)

The following three items in Course Documents on Blackboard:(1) MIGA PRI Contract (familiarize yourself with it dont read allparts of it in detail)(2) Sheppard, We Shall Overcome in Project FinanceInternational Multilaterals Report(3) Sheppard, Carbon Credits: An External Financing Source forLatin American Project Financing

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Week 10

Capital Markets and Project FinanceReading: Yescombe, Principles of Project Finance, pp 59 63

The following items posted in the Course Documents section ofBlackboard:

(1) Moodys Pre-sale Report for Tiet(2) Fitchs Pre-sale Report for Tiet(3) Sheppard, Protecting International Infrastructure Transactionsfrom the Risk of Devaluation: AES Tiet and the Use of ForeignExchange Liquidity Facilities(4) Tiete transaction diagram (PowerPoint)(5) Tiete Comparables Memo

Week 11

Project Finance from the Perspective of Equity Investors, Restructurings

Reading: Erik Woodhouse, The Experience with Independent PowerProjects (IPPs) in Developing Countries: Interim Report, PESDWorking Paper #39, 2005

Assignment: Select one of the four countries following countries that haveinvestment-grade local currency ratings but below investment-grade foreign currency ratings: Colombia, Egypt, Jordan, andMorocco. Write a brief (no more than two pages)recommendation of which country you would select to make aproject finance investment (in any sector you chose - e.g., power,transport, water, etc.), with a rationale for your selection. A fileposted on Blackboard (IMF Data) contains selected information oneach country for the period 1990 - 2007. You may find this

information helpful, but you will undoubtedly find equally usefulinformation from the World Bank web site, PPI database, andother information you can access on line. For purposes ofcomparison, another file posted on Blackboard contains currentratings for all countries that have ratings from one of the threemajor rating agencies.

Basel II and Its Impact on Project Financings (covered in class by slides)The Equator Principles (covered in class by slides)

Week 12

Asia/South Asia, Equity Issues, Infrastructure FundsCase: Quezon (Philippines) (a case dealing with equity valuation issues

in relation to country risk)The case is available at:

http://cb.hbsp.harvard.edu/cb/search/quezon?Ntk=HEMainSearch&N=0

Reading: Pei Yee Woo, Independent Power Producers in Thailand, PESDWorking Paper #51, August 2005Orr, The Rise of Infra Funds

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Assignment: Quezon case analysis, up to 3 pages of text, plus exhibits

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Week 13

Latin America

Reading: Argentine Gas Trust Analysis (Moodys)

Nuez-Luna and Woodhouse, The IPP Investment Experience inArgentina PESD Working Paper #44, August 2005

Transport projectsReading: Talca-Chillan Toll Road Case Note (Chile)

Sheppard, Transport Projects

Reform of Infrastructure Sectors and Investment Outcomes: A Comparison of Argentina,Brazil, and Mexico Covered by slides in class

Week 14

Whole Business Securitization

Reading: Moodys, UK Water Sector: Highly-Leveraged FinancingStructures An Update, June 14, 2010

Africa, Overview of All Infrastructure Sectors

Reading: Sheppard, Financing of Private Infrastructure in Sub-SaharanAfrica, PPIAF, June 2006

Sheppard, Managing Risks of Infrastructure Investment,

Business and Economy, (India) September, 2011

Unanswered Questions: Project Finance vs Structured Finance, Project FinanceCLOs, Enron

Review for exam

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