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Posts: 36
Joined: April 22nd, 2004, 10:17 pm

"Superproject" bonds

April 26th, 2004, 4:09 pm

Uncommon as it is for me, I recently picked up an issue of Popular Science which inguigingly enough described projects like a submerged vacuum tunnel through which Maglev trains could get from New York to London in about an hour. Given that such a project would easily cost over $100 billion, take over a decade to build, have uncertain future benefit (remember Iridium), and likely not be publicly funded in the face of Budget cuts, has anyone thought of how a securitization might fund such a project while providing investors a new generation of exposure certificates?Besides the fantasy-level of sci-fi coolness involved in such a project, it is interesting to note that the high fixed costs would be offset by relatively low variable costs for the train service, greatly reduced dependence on the price of oil, and broad economic benefit.On the flipside, could a financial economist conclude that if a securitization could not raise enough to fund such a project, that such a project is not economically "worth it"?
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Joined: September 27th, 2002, 1:19 pm

"Superproject" bonds

April 26th, 2004, 4:23 pm

just because you use securitization doesn't mean that you have access to infinite capital and the investors can wait arbitrarily long to reap returns! if I put a dollar of equity in today, do I expect to either- receive a million bucks on my 100th birthday, or- receive nothing?Projects with this kind of operating leverage are very tough to evaluate. The most recent batch of losers includes power plants and telecom networks. When these projects get built, P(cost overrun occurs) = very high, and the market mechanism for revaluing the assets in this kind of situation will kill you. Think about all that 'dark fiber' out there - trouble is that the variable costs are so low, your customers expect to pay nothing for your services, so if you value the asset as a function of your profits, it will be maybe a millionth of what the original buyer paid. Eurotunnel's another good example. The 'size' of this project is not quite $10bn. But the market for substitutes is pretty cheap, and volumes are crap. I would not be an investor in these bonds at the prices I'm sure the new team is hoping for. Besides that, yes it would be cool to build such things, but you're never going to get laws around that. I'd borrow $100bn to take over Iraq and manage the oil resources with a very large team of vigilantes. But there again, look at the prices paid for Alaska, the Louisiana purchase, Manhattan, etc... Better to buy somebody's failed investment than to be first in line to open your wallet.As for direct experience... we were investors in Winstar
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Joined: November 15th, 2001, 7:54 pm

"Superproject" bonds

April 26th, 2004, 4:29 pm

What about the "Three Gorges Dam" project in China? It is smaller, e.g. $25 billion or so. I heard quite some fund in US withdrew from it, rumors said corruption already ate $600 million out of it. The project is still going on.

PW by JB has been "Serving the Quantitative Finance Community" since 2001. Continued...

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