ProjectFinancing

Case:EuroDisneylandS.C.A:The ProjectFinancing

KeyFactorsofProject!
Estimate Customer Advance

Expect Uncertainty andDeviations

ManagementandControlStructureofthe EuroDisneylandProject

OwnershipStructure
51%

ECCInvestors

Euro Disneyland SCA

49%

100%

WDC

EDIHolding Company

ManagementControl
Euro Disneyland S.A.
100% Management Company

Euro Disneyland SCA

GP

100%

WDC

EDL Holding Company

100 %

EDI Participatio nsS.A.

MagicKingdomFinancingStructure
83%

French Corporations
Euro Disneyland S.A EDI Participatio nsS.A.

EuroDisneyland SNC(Financing Company)

Manage

100%

WDC

17%

OwnershipFollowingIPO
Royalties

Incentivefees

Cashflow returnto WDCfrom Euro Disneyland Project

DividendfromS.C.A.

DepreciationtaxshieldsfromtheS.N.C.

Disneysparticipationinnetprofits

ReimbursementofFF2.762billionofdevelopmentcostspreviously incurredbyWDC

WhoStandstoGain?
WDC European Equity Investors FrenchGovt.

European Banks

EuropeanDemandforanAmericanStyleThemePark??

FinancialTransformation

EuroDisney LandProject

EuroDisney LandProject

AllEquity WhollyownedunitofWDC Private SimpleGovernance OneStakeholder InternalFinancing Unlevered

Leveragedpublicfirm MinorityownedbyWDC Public ComplexGovernance MultiStakeholder ExternalFinancing Levered

FinancialTransformation
Privateto public Recourseto nonrecourse financing

Noleverageto highleverage

WhatarethePotentialGainstobemadeby WDCfromtheFinancialRestructuringaProject?

Ownershipfallingfrom100% to40%

ClaimtoallFCFisexchanged foramixtureofresidual equitycashflowsandmore predictableseniorflowsinthe formoffees,royalties, incentivepayments,etc.

Sizabledevelopmentcostsare recovered

Capitalexposureisreduced

Interestintheprojectis renderedmuchmoreliquid

ShareofProjectRisk
Diffusesriskawayfromthe originalprojectsponsor WDCrecoversFF1.9billion throughS.A.andleftwith equityinvestmentofFF828 millioninprojectwithaBV ofassetsofFF9.3billion

WDCownonly49%of sharescontrol100% ownershipthroughEuro DisneylandS.A.

WDCfor49%interest contributedonly13%ofBV ofequity

TypesofRisksInvolved
Construction Delays Surprise Expenses Cost overruns Laborand SocialUnrest Attendance Shortfalls Government Intervention

Foreign Exchange

Financial Default

ProjectFinancingAttributes
Createseparatelegalentity Specificasset SeparablefromSponsor Finitelife Physicallyremovable Clearlystatedobjective Likelyconclusion Expensivetosetupprojectfinancing

Projectshouldbigandinvolvelargemoney

Norecourseentity

InternalFinancingandProject Financing Flexibility

Flowoffunds are commingled Management discretionis high Lowinvestor monitoring
Allflowsare earmarkedand separated Management discretionislow

Fullpayouttoinvestors throughdividendsor contractualstock repurchases

Obtainscapitalwhile preservingcontrol

Permitsredeployment ofcorporatecapital

Preservesparents unuseddebtcapacity

InternalFinancingandProject Financing Risk

Risksofdifferent projects contaminateeach other
Spinoffprojectriskto separatecompany

Fullrecourseto parent

Nonrecourseriskto parent

Diversifiesfirms assetportfolio

Shareholderssee typesofriskallocated tothosemostableto bearthosetypes

InternalFinancingandProject Financing Income

Inflowsare fullyfungible Disposedby common policy Investorsare exposedto agencycost
Loweragency costs Possiblehigher information, transaction,and contractingcosts

Improved efficiencyof valuation

Improvedrisk control

Reduced bankruptcycosts

Possiblehigher leverage

InternalFinancingandProject Financing Control

Disintegration permitsincreased accountabilityto investors Initialstructuring receivesgreat scrutiny Capitalistobe returnedto investors,by contract Assetsandcash flowsare separated Projectbased managementis visibleandclearly accountable

Management Standsbetween projectand investor

Management remainsincontrol

InternalFinancingandProject Financing Timing

Slowtoputtogether

Relativelyquick
Financinglifetimeis finiteandhighly structured

Projectlifeeasily mayberolledover orextended indefinitely

Projectisrefinanced and/orfinancing lifetimeusextended withgreaterdifficulty

InternalFinancingandProject Financing Other

Throughfungibility ofcash, eachprojectbenefitsfrom theinternalliquidityofthe firm

Limitedtransferabilityof investmentinterest lowliquidityofsecurities

Incentivesforkeypeople maybemoreeasily structured

Iftheparentshaveliquidity problem,parentcould bleedtheprojectofits cash,possibleendangering thelifeoftheproject

Newconflictsofinterest maybecreated

Projectisinsulatedform theparent,failureof parentmayposeless dangertoproject

ProjectFinancingisSuitablefor..
Costsoffinancialtailoring andmonitoringare significantinproject financings Parentissensitivetouseof debtcapacityonitsbalance sheetandrelativelyless interestedinthefungibility ofprojectfunds

Large,complex,andstand aloneprojects

Parentsconcernonbearing thetotalriskoftheproject

Parentcarestomaintain operatingcontroloverthe projectbutiswilltoaccept inflexibilityinthestructure oftheproject

ProjectinProjectFinance
Notconsolidatedas notcontrolledbythe reportingentity Liabilitiesremain withinringfenced entity Special PurposeVehicle(SPV)

Offthebalancesheet oftheSponsors

Majorproductive capitalinvestment

WhyuseProjectFinance?
Amounttoolargefor companyBalanceSheet Toomuchriskforone companytobear share differentriskswiththose betterabletoassessand managee.g.Oilexploration, developmentandproduction

Companypolicyforoff balancesheetwithor withoutrecourse

Politicalrisks local regulationsrefforeign shareholdings

103

WhyuseProjectFinance?
Existingcovenants Project developmenttime

Ringfencealso helpsprotectthe projectfrom sponsorfailure

104

WhyProjectFinance?
IsolateRisk Project Transparency Control/ Ownership issues
105

Greater Leverage

WhyProjectFinance?
Complex contractual arrangements Riskmanagement strategiesand techniques Limitedornon recourse financing Changing perceptions,new innovations
106

WhyProjectFinance?
Usemarkethedging instruments(derivatives) forcoveringmarketwide risks(interestandexchange ratefluctuations)

Allocateprojectspecific riskstopartiesbestableto bearthem

Controlperformancerisks throughincentivecontracts

Preservationofborrowing capacityandcreditrating

Maybeonlywaythat enoughfundscanberaised

FinancingaProjectvs.ProjectFinance
BalanceSheetFinancing RecourseFinancing ProjectLendershavea lowlevelofdue diligenceontheproject itself,butahighlevelof duediligenceonfirm

Firm Other Equity Investors

Equity Equity Returns Debt Repayment

Lenders Other Lenders/ Bondholders

Debt

Project

ProjectFinanceComparisonwith OtherVehicles
Financing vehicle Secured debt Subsidiary debt Similarity Collaterized with a specific asset Dis-similarity Recourse to corporate assets Possible recourse to corporate balance sheet Collaterized and nonrecourse High debt levels Concentrated equity ownership Hold financial, not single purpose industrial asset No corporate sponsor Lower debt levels; managers are equity holders

Asset backed securities LBO / MBO Venture backed companies

DisadvantagesofProjectFinancing
Projectdebtis substantiallymore expensive(50400basis points)duetoitsnon recoursenature

Longertostructurethan equivalentsize corporatefinance

Highertransactioncosts duetocreationofan independententity

Extensivecontracting restrictsmanagerial decisionmaking

Projectfinancerequires greaterdisclosureof proprietaryinformation andstrategicdeals

ProjectFinanceisVeryCostly
Transactionscosts verylarge Verycomplex organizational structure,not muchflexibility

Longnegotiations, longtimetoclose

Fees