Chapter 6 - Joint Venture Financing Flashcards
What is the range of targeted returns in JV Financing?
Between 20-30% to compensate for risks associated with investing in a project with limited collateral and uncertain future cash flow
How do Joint Ventures approach Tenure / Duration?
JV agreements often allow JV to continue until the occurrence of a specific event that constitutes a “termination” of the JV. This depends on the goals of both of the members of the JV.
What 3 rights and responsibilities are lenders in JV financing most concerned with?
1) Duration of their “Earn-in” phase
2) Circumstances in which they can abandon the project
3) Level of Fiduciary Duty that they owe to the other partner(s) in the JV.
What does it mean if a lender “sits” in on a project?
A lender is “sitting in” on a project when they delay financing the project but prevent the borrower from obtaining outside financing
What two things are a borrower most concerned about?
1) The right to retain some control over the project
2) The right to specific minority protections
What are the 3 key advantages of JV Financing?
1) Cash Flows - available to young companies with poor credit ratings that cant get equity financing
2) Maintain Independence over other business other takings and limited covenants
3) Strategic benefits such as credibility, access to technical resources, industry expertise, etc.
What are the 4 key disadvantages of JV Financing?
1) Limited to specific industries (often capital intensive), where strategic players are willing to act like financial buyers. Equity and debt financing are suitable for a broad range of industries.
2) Must give up more control than what is required in debt financing and often must relinquish management
3) More complex to negotiate and manage JV Structure
4) Less attractive tax structure relative to debt financing. A JV may lose some of its tax benefits by way of flow-through shares.
How can a company utilizing JV Financing get out of the agreement?
1) Sell its interests to another JV Partner
2) Sell to an outside Party
3) Trigger a termination clause
What does it mean for a JV Agreement to contain a right of first refusal?
Other partners will first have the opportunity to buy a partner’s interest before it is offered to a third party.
