Turning Around Distressed Project Finance Assets in India: What More Needs to Be Done?

2018 ◽  
Keyword(s):  
Cash Flows ◽  
Project Finance ◽  
Cost Of Debt ◽  
Risk Allocation ◽  
Debt Overhang ◽  
Balance Sheets ◽  
Infrastructure Project ◽  
Bankruptcy Code ◽  
The Cost ◽  
Future Cash Flows

With the Insolvency and Bankruptcy Code firmly in place, India’s distressed project finance assets are turning out to be attractive to institutional investors. Project finance assets need asset-and deal-specific financing solutions in order to achieve successful turnarounds. The turnaround solution must ensure optimum risk allocation and mitigation leading to the buildup of future cash flows. This will, in turn, lead to deleveraging of stressed balance sheets. The authors present a conceptual model and argue that even now the political and regulatory risks for infrastructure project loans in India have not been completely mitigated. This has resulted in a situation of a debt overhang, wherein even economically viable projects may not attract fresh funding. To address this, the article suggests the possible use of priority funding structures, where existing lenders cede charge of the assets in favor of a new lender as a way to reduce the cost of debt and unlock shareholder value. This solution will also ensure that the restructuring package is properly priced (from the project finance lender’s perspective), resulting in the efficiency and viability of the restructured asset.

Does earnings quality affect the cost of debt in a banking system? Evidence from French listed companies

2020 ◽  
Vol 45 (4) ◽  
pp. 183-191
Author(s):  
Asma Houcine ◽  
Walid Houcine
Keyword(s):  
Earnings Quality ◽  
Estimation Error ◽  
Banking System ◽  
Cash Flows ◽  
Economic Consequences ◽  
Cost Of Debt ◽  
Financial Reports ◽  
The Cost ◽  
Future Cash Flows

This study examines the effect of earnings quality on the cost of debt, for a sample of French listed firms from 2005 to 2015. Using accruals quality (AQ) as a proxy for the quality of financial reports, the results obtained confirm the research hypothesis formulated, showing that the quality of financial reports is negatively related to firms’ interest cost. The results also support that the innate component of AQ has a greater impact on the cost of debt than the discretionary component. The findings of this study may be of interest to managers by providing evidence on the economic consequences of improved earnings on the cost of debt and the factors that determine debt pricing in making decisions to minimize it. The results of this article are also important for creditors, that is, banks, showing that earnings are important in predicting firms’ reimbursement capacity (i.e. future cash flows) and that less estimation error in accruals improves the ability of earnings to predict future cash flows.

scholarly journals Cash flow disaggregation and prediction of cash flow

2017 ◽  
Vol 18 (4) ◽  
pp. 464-479 ◽  
Author(s):  
Ehsan Khansalar ◽  
Mohammad Namazi
Keyword(s):  
Cash Flow ◽  
Balance Sheet ◽  
Cash Flows ◽  
Prediction Errors ◽  
Content Type ◽  
Balance Sheets ◽  
Income Statement ◽  
Aggregated Model ◽  
Flow Components ◽  
Future Cash Flows

Purpose The purpose of this paper is to investigate the incremental information content of estimates of cash flow components in predicting future cash flows. Design/methodology/approach The authors examine whether the models incorporating components of operating cash flow from income statements and balance sheets using the direct method are associated with smaller prediction errors than the models incorporating core and non-core cash flow. Findings Using data from US and UK firms and multiple regression analysis, the authors find that around 60 per cent of a current year’s cash flow will persist into the next period’s cash flows, and that income statement and balance sheet variables persist similarly. The explanatory power and predictive ability of disaggregated cash flow models are superior to that of an aggregated model, and further disaggregating previously applied core and non-core cash flows provides incremental information about income statement and balance sheet items that enhances prediction of future cash flows. Disaggregated models and their components produce lower out-of-sample prediction errors than an aggregated model. Research limitations/implications This study improves our appreciation of the behaviour of cash flow components and confirms the need for detailed cash flow information in accordance with the articulation of financial statements. Practical implications The findings are relevant to investors and analysts in predicting future cash flows and to regulators with respect to disclosure requirements and recommendations. Social implications The findings are also relevant to financial statement users interested in better predicting a firm’s future cash flows and thereby, its firm’s value. Originality/value This paper contributes to the existing literature by further disaggregating cash flow items into their underlying items from income statements and balance sheets.

scholarly journals Optimizing Risk Allocation in Public-Private Partnership Projects by Project Finance Contracts. The Case of Put-or-Pay Contract for Stranded Posidonia Disposal in the Municipality of Bari

2020 ◽  
Vol 12 (3) ◽  
pp. 806 ◽  
Author(s):  
Antonella Lomoro ◽  
Giorgio Mossa ◽  
Roberta Pellegrino ◽  
Luigi Ranieri
Keyword(s):  
Real Option ◽  
Public Support ◽  
Treatment Plant ◽  
Cash Flows ◽  
Public Private Partnership ◽  
Project Finance ◽  
Risk Allocation ◽  
Private Partnership ◽  
Put Options ◽  
The Impact

This paper investigates the impact of the adoption of public support on the performance of public–private partnership (PPP) projects as perceived and measured by the different actors involved. In particular, the public support investigated by this study is put-or pay contracts, which are often used in PPP projects financed through project finance to optimize risk allocation. In order to quantify the benefit gained by each party with and without the put-or-pay contract, cash flows of the project have been modeled by using the concept of real option, defined as the right without the obligation to make an action if it is convenient to do so. This concept enabled us to model and quantify the inner flexibility mechanism of put-or-pay contracts. With a put-or-pay agreement signed between the municipality, a (private) owner, and operator of a disposal facility, the owner of the facility has the faculty, without any obligation, to require the payment of penalty, if the municipality fails to meet its obligations. This means that the owner of the facility holds a series of European put options that can be exercised if it is convenient for the holder. The developed model has been used for studying the effectiveness of put-or-pay contracts for financing the treatment plant of a special dispose through project finance, i.e., the plant for disposal of marine plant posidonia.

Evaluation of Non-marginal Projects

2012 ◽  
Author(s):  
Christian Gollier
Keyword(s):  
Social Welfare ◽  
Social Welfare Function ◽  
Cost Benefit Analysis ◽  
Investment Project ◽  
Cost Benefit ◽  
Cash Flows ◽  
The Social ◽  
Macroeconomic Effects ◽  
The Cost ◽  
Future Cash Flows

This chapter shows that the cost-benefit analysis can be used only if the actions under scrutiny are marginal, that is, if implementing them has no macroeconomic effects. Otherwise, one needs to go back to the basics of public economics to evaluate these actions. The chapter examines the error that one makes by following the classical discounting approach when evaluating non-marginal projects. The evaluation of non-marginal projects must be done by measuring their impact on the social welfare function. A non-marginal investment project with positive future cash flows will have an impact on welfare that is smaller than when estimated by using the standard discounting method.

scholarly journals The Cost to Firms of Cooking the Books

2008 ◽  
Vol 43 (3) ◽  
pp. 581-611 ◽  
Author(s):  
Jonathan M. Karpoff ◽  
D. Scott Lee ◽  
Gerald S. Martin
Keyword(s):  
Regulatory System ◽  
Cash Flows ◽  
Point Estimate ◽  
Present Value ◽  
Implicit Contracts ◽  
Financing Costs ◽  
Widespread Belief ◽  
The Cost ◽  
Future Cash Flows ◽  
Additional Loss

AbstractWe examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978–2002, which we track through November 15, 2005. The penalties imposed on firms through the legal system average only $23.5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty—which we define as the expected loss in the present value of future cash flows due to lower sales and higher contracting and financing costs—is over 7.5 times the sum of all penalties imposed through the legal and regulatory system. For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3.08. Of this additional loss, $0.36 is due to expected legal penalties and $2.71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3.83. In the cross section, the reputation loss is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books.

scholarly journals Managing the UK National Debt 1694–2018

2020 ◽  
Vol 12 (3) ◽  
pp. 227-257
Author(s):  
Martin Ellison ◽  
Andrew Scott
Keyword(s):  
Market Price ◽  
Cash Flows ◽  
Debt Management ◽  
Cost Of Debt ◽  
Substantial Cost ◽  
Operational Risks ◽  
The Government ◽  
Individual Bond ◽  
The Uk ◽  
The Cost

We examine UK debt management using a new monthly dataset on the quantity and market price of every individual bond issued by the government since 1694. Our bond-by-bond dataset identifies variations in the market value of debt and so captures investors’ one-period holding returns, which is the cost of debt management in the government’s intertemporal budget constraint. We find a substantial cost advantage in favor of issuing short bonds, even when considering some of the operational risks implied by cash flows and gross redemptions. (JEL F34, G15, H63, N23, N24, N43, N44)

scholarly journals The Linkage between ESG Performance and Credit Ratings: A Firm-Level Perspective Analysis

2017 ◽  
Vol 12 (9) ◽  
pp. 53 ◽  
Author(s):  
Alain Devalle ◽  
Simona Fiandrino ◽  
Valter Cantino
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Cash Flows ◽  
Cost Of Debt ◽  
Firm Level ◽  
Public Firms ◽  
Clear Cut ◽  
Final Sample ◽  
Decision Making Processes ◽  
The Cost

This paper investigates the effect of environmental, social, and governance (ESG) performance on credit ratings. We argue that ESG factors should be considered in the credit analysis and the creditworthiness evaluation of borrowers because they affect borrowers’ cash flows and the likelihood of default on their debt obligations. Consequently, we develop our research by firstly reviewing the literature regarding ESG commitments within financial decision-making processes and then addressing the relation between ESG performance and the cost of debt financing. We reveal no unanimous results and no clear-cut boundaries on this matter yet. Secondly, to disentangle this relationship, which is not well defined by scholars, we empirically investigate the nexus between ESG performance and credit rating issues on a sample of 56 Italian and Spanish public firms for which ESG performance in 2015 was achieved. Our final sample includes 15 variables for 56 observations: 840 items are under analysis. Our findings suggest that ESG performance, especially concerning social and governance metrics, meaningfully affects credit ratings. We do not sort out significant results referring to environmental scores, so further research is needed to investigate this ever-growing matter and strengthen this considerable nexus.

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