프로젝트 파이낸스(Project Finance)의 理論的 存立根據와 金融構造에 대한 法的 考察
The Theoretical Rationale and the Credit Structure of the Project Finance
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Companies are increasingly using project finance to fund large-scale capital expenditures. With project finance(“PF”), sponsoring firms create legally distinct entities, project company(“PC”), to develop, manage, and finance the project. PC borrows on a limited or non-recourse basis, which means that loan repayment depends on the project’s cash flows rather than on the assets or general credit of the sponsoring organizations. Despite the non-recourse(or limited recourse) nature of project borrowing, projects are highly leveraged entities: debt to total capitalization ratios average 60-70%, but can reach as high as 95% in some deals. First question raised with regard to PF, is to ask why firms use PF instead of traditional, on-balance sheet corporate finance(“CF”) and furthermore what are the legal and economical-managerial rationales for the PF. Scholars and people in the past claimed that PF allows firms to isolate project risk(“PR”), to increase equity returns, to preserve (or expand) debt capacity, and to mitigate sovereign risk. However, such claims has faced a lot of criticism, and now forerunners in the field of study on PF are arguing that, in the right settings, PF allows firms to minimize the net costs associated with market imperfections such as transactions costs, asymmetric information, incentive conflicts, financial distress, and taxes. At the same time, it allows firms to manage risks more effectively and more efficiently. These factors make project finance a lower-cost alternative to conventional, on-balance sheet, CF. There are costs stemming from asymmetric information between corporate insiders and outsiders, and from incentive conflicts among managers, shareholders, and creditors. The PF is the best solution to such asymmetric information problems. In this regards, Project Financing reduces information costs, incentive conflicts, the costs of financial distress. These are the economical-managerial rationales for the PF. On the other hand project sponsors(“PS”) and the banks agree to establish PC and the banks make loans to this PC on a limited or non-recourse basis, which creates the PF in the real sense in contrast to conventional CF. According to this scheme, the PF in the real sense can be defined as ’a financing of a particular economic unit in which a lender is satisfied to initially look to cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid, and to the assets of the economic unit as collateral for the loan (as Nevitt and Fabozzi described). Therefore, it can be said that the agreement to bank’s making loans to the PC on a limited or non-recourse basis is the legal rationale for the PF. However, it is very surprising to us that the banks in Korea are still relying on the contentional CF scheme even in the development of the project which really requires the mechanism of the PF in the real sense In order to develop the theories of the PF, it needs to study large projects. Large projects are more attractive than small projects because they allow us to observe managers as they make very conscious investment and financing decisions. When managers make large investment and financing decisions, they have the ability and the economic incentive to make careful, value-enhancing decisions. They have the ability because large projects require at least one and up to five years to structure. and they have the incentive because significantly more money is at stake. both their personal wealth and their professional reputations are on the line as well as substantial amounts of capital from other investors. In addition, it is a challenging task to draft a model contract form for the project agreement and the credit agreement, which will be used when the parties agrees that the banks make loans to this PC on a limited or non-recourse basis.
Abstract
Companies are increasingly using project finance to fund large-scale capital expenditures. With project finance(“PF”), sponsoring firms create legally distinct entities, project company(“PC”), to develop, manage, and finance the project. PC borrows on a limited or non-recourse basis, which means that loan repayment depends on the project’s cash flows rather than on the assets or general credit of the sponsoring organizations. Despite the non-recourse(or limited recourse) nature of project borrowing, projects are highly leveraged entities: debt to total capitalization ratios average 60-70%, but can reach as high as 95% in some deals. First question raised with regard to PF, is to ask why firms use PF instead of traditional, on-balance sheet corporate finance(“CF”) and furthermore what are the legal and economical-managerial rationales for the PF. Scholars and people in the past claimed that PF allows firms to isolate project risk(“PR”), to increase equity returns, to preserve (or expand) debt capacity, and to mitigate sovereign risk. However, such claims has faced a lot of criticism, and now forerunners in the field of study on PF are arguing that, in the right settings, PF allows firms to minimize the net costs associated with market imperfections such as transactions costs, asymmetric information, incentive conflicts, financial distress, and taxes. At the same time, it allows firms to manage risks more effectively and more efficiently. These factors make project finance a lower-cost alternative to conventional, on-balance sheet, CF. There are costs stemming from asymmetric information between corporate insiders and outsiders, and from incentive conflicts among managers, shareholders, and creditors. The PF is the best solution to such asymmetric information problems. In this regards, Project Financing reduces information costs, incentive conflicts, the costs of financial distress. These are the economical-managerial rationales for the PF. On the other hand project sponsors(“PS”) and the banks agree to establish PC and the banks make loans to this PC on a limited or non-recourse basis, which creates the PF in the real sense in contrast to conventional CF. According to this scheme, the PF in the real sense can be defined as ’a financing of a particular economic unit in which a lender is satisfied to initially look to cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid, and to the assets of the economic unit as collateral for the loan (as Nevitt and Fabozzi described). Therefore, it can be said that the agreement to bank’s making loans to the PC on a limited or non-recourse basis is the legal rationale for the PF. However, it is very surprising to us that the banks in Korea are still relying on the contentional CF scheme even in the development of the project which really requires the mechanism of the PF in the real sense In order to develop the theories of the PF, it needs to study large projects. Large projects are more attractive than small projects because they allow us to observe managers as they make very conscious investment and financing decisions. When managers make large investment and financing decisions, they have the ability and the economic incentive to make careful, value-enhancing decisions. They have the ability because large projects require at least one and up to five years to structure. and they have the incentive because significantly more money is at stake. both their personal wealth and their professional reputations are on the line as well as substantial amounts of capital from other investors. In addition, it is a challenging task to draft a model contract form for the project agreement and the credit agreement, which will be used when the parties agrees that the banks make loans to this PC on a limited or non-recourse basis.
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