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

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. Keywords: