Aes Valuation

The separation of the parent company is structured through the creation of a Special Purpose Vehicle (SPV). This SPV is the formal borrower under all loan documents so that in event of default or bankruptcy AES is not directly responsible before financial creditors. Instead, their legal claims are against the SPV assets.

Maximize Leverage

Currently AES seeks to finance the cost of development and construction of the project on highly leveraged basis. High leveraged in non-recourse project financing permits AES to put less in capital to put at risk permits AES to finance the project without diluting its equity investment in the project.

Off-Balance Sheet Treatment

AES may not be required to report any of the project debt on its balance sheet because such debt is non-recourse. Off balance sheet treatment can have the added practical benefit of helping the AES comply with covenants and restriction relating to borrowing funds contained in loan agreements to which AES is also a party.

Agency Cost

The agency costs of free cash flow are reduced. Management incentives are to project performance. Most importantly close monitoring by investors is facilitated.

Multilateral Financial Institutions

One of the four constituents that have contractual arrangement with the SPV in a typical project are the banks (an integral part group of financiers that include share holders, insurers, equipment manufacturers, export credit agencies and funds).Among these banks there are multilateral financial institutions (like IFC, CAF and etc). Presence of these institutions as financiers helps in raising capital from these institutes at lower cost and secondly it is also read as a positive sign by commercial banks.

Drawbacks

Projects V/S Division

The company is not only expanding its geographical boundaries, but it is also diversifying its business through backward and forward integration. The current financial model does not provide the AES with the big picture, which now...