Transcript PowerPoint Presentation - Explicit Deposit Insurance?

Project Finance and
Credit Risk Management
Table of Contents
1.
2.
3.
Project Finance Overview
Credit Risks in Project Finance
Credit Risk Management (Financial Risks)
1
2
3
4.
Cash Flow Analysis I (NPV and IRR)
Cash Flow Analysis II (Individual Cash Flows)
Stress Testing/Simulation
Credit Risk Management (Political Risks)
1. Project Finance Overview
Basel’s Definition of PF (in short)

A simple cash-flow stream


Non- or limited-recourse


The value of PF relies on a simple cash-flow stream generated by a
single project and the collateral value of the project assets: the source
of the cash-flow may be a single buyer or consumers.
An independent SPE is created to hold the project assets and to
integrate all legal contracts in an effective and efficient manner for
funding, building and operating a single purpose project. SPE is owned
by one or a few sponsors and it is highly leveraged.
Risk allocation

PF is used for large, complex, and expensive industrial facilities such as
natural resources and infrastructure sectors, which involve a series of
legal contracts in a vertical chain from input supplier to output
purchaser.
Based on: International Convergence of Capital Management and Capital Standards, BIS, 2006, para 221,222
Why PF Structure? Sponsors’ Motivation

Risk mitigation/Debt capacity



To create asset specific governance structure


By isolating the asset in a standalone project company, project finance
reduces the possibility of risk contamination, the phenomenon whereby a
failing asset drags an otherwise healthy sponsoring firm into distress.
The sponsor can preserve corporate debt capacity.
Separate legal incorporation, which assumes a specific project and few
growth options, reduces both the cost of monitoring managerial actions
and assessing performance, and wasteful expenditures and sub-optimal
reinvestment.
Deterrent against strategic behavior by the third parties


Sponsor can involve the critical parties for the project, including the public
sector, as shareholders to prevent future conflict.
By involving international banks and multilateral agencies whose interest
is solely in cash-flow maximization by the project, the sponsor may
prevent harmful action by the host government.
Based on: The Economic Motivations for Using Project Finance, Benjamin C. Esty, 2003
PF vs. Corporate Finance

Project Finance






Corporate Finance
Limited or non-recourse
Simple cash-flow structure
produced from one
independent waste asset

High-leverage at beginning,
but getting lower toward the
end of the debt repayment
Relatively a few layers of
debt and equity structure
(simple ownership)
Applied to projects attaining
a scale of economy




Full recourse
Complicated cash-flow
structure produced from a
set of various, replaceable
profit making projects
Leverage depends on a
company’s target capital
structure
Various layers of debt and
equity structure
(complicated ownership)
Applied to all profit making
business types
Typical Structure of Conventional PF
Sponsors
Multilateral/
bilateral
agencies
Lenders
Shareholders Agreement
Equity
Loan Agreement
Debt
License/permit
Central/local
Government
Concession
Agreement
Concession
Authority
Insurance
Equipment
suppliers
Construction
Contractors Agreement
Input
supplier
Power/utility
Supply
agreement
Insurers
Off-take agreement
Project
company
(SPE)
Off-take
purchaser
Operation/maintenance Agreement
Operator
2. Credit Risks in Project
Finance
Project Finance Credit Risks Overview
Force Majeure
Events
Political
Risks
Contractual
Risks
Financial
Risks
Natural
War & Civil
Civil
Creeping
Commercial Market
Disaster
Disturbances Movements Expropriation
Risks
Risks
• Fire
• Strike
• Environment • Corruption
• Construction • Interest rate
• Flooding • Insurrection • Human rights • Legal/regulatory • Facility site • Exchange rate
-irregularities
• Equipment • Inflation rate
• Earthquake • Terrorism • CSR
• War
• Religion
• License/Permit • Technology • Labor cost
• Volcano
• Nationalism • Concession
• Off-take
• Product market
• Disease Outright
• Input
• Input market
Expropriation• Globalization • Taxes
• Equity-holding
• Operation
• Salvage cost
• Expropriation
• Currency
• Utility
• Confiscation
-inconvertibility • Collateral
• Nationalization
• Expatriation
• Mineral reserves
• Preemption/priority• Reporting accuracy
• Breach of contract
• Foreign worker limitation
• Law enforcement
3. Credit Risk Management
(Financial Risks)
3.1 Cash Flow Analysis I
(NPV and IRR)
Net Present Value (NPV) I
Financial Agreement (Closing)
t=5
Free
cash flow
t = 10
t = 20
t = 30
t = 40
Year
Salvage
value
Sank
costs
Sank cost does not affect
cash flow analysis because
it is an existing fact regardless
of the investment decision
(it is not incremental costs).
Cash
out flow
t=0
t=1
t=2
Present Value
Example
- CF2
(1 + r ) 2
Present value of
cash out flow at t=2
PV =
Present value of
cash in flow at t=10
CF10
PV = (1 + r ) 10
Net Present Value (NPV) II
PV0 =
- CF0

- CF2
Present value of
cash out flow at t=0
PV2 = (1 + r) 2
Present value of
cash out flow at t=2
CF10
PV10 = (1 + r) 10
Present value of
cash in flow at t=10





Net of all present value of cash out flow and
all present value of cash in flow is:
Negative value because they
are cash out flow
Positive value because they
are cash in flow

NPV = PV0 + PV1 + PV2 + PV3 +  + PV42
CF10
CF42
- CF1
- CF2
= - CF0 + (1 + r ) 1 + (1 + r ) 2 +  + (1 + r )10 +  + (1 + r )42
42
CFt
As long as this value is positive, the project will produce
= tΣ
t
= 0 (1 + r)
more cash than necessary to repay debt and dividend.
Net Present Value (NPV) III

Implication




Positive NPV: the project will generate more cash than the necessary
amount to repay debt to banks and deliver dividend to shareholders, the
excess cash solely to the project’s shareholders.
Zero NPV: the project will generate exactly the necessarily amount of
cash to repay debt to the banks and deliver dividend to shareholders.
Negative NPV: the project cannot generate cash to repay debt to banks
and deliver dividend to shareholders.
Weak point of NPV is that it produces only absolute values.

$1 million investment and $1 thousand investment could, theoretically,
produce the same NPV values.
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Internal Rate of Return (IRR)

Method

IRR is defined as the discount rate that assumes NPV is equal to zero.
N
IRR =

Implication

CFt
(1 + r) t = 0
IRR is useful when investors assess the project against their hurdle
rate, which is a cost of capital.



Σ
t=0
IRR > Hurdle Rate: the project will produce more cash than the necessary
amount to repay debt and deliver dividend to shareholders.
IRR = Hurdle Rate: the project will produce the exact amount of cash to
compromise investors’ cost of capital.
Weak points of IRR


It applies the project’s IRR to the reinvestment of cash in flows
When there are more than one change from cash out-flow to cash-in flow, or
from cash-in flow to cash out-flow in the projection, the value of IRR are
more than one: calculator would simply indicate “error”
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Modified Internal Rate of Return (MIRR) I
Financial Agreement (Closing)
Cost of capital →
Free
cash flow
Year
Sank
costs
N-t
(1 + r )
1
(1 + r ) t
Cash
out flow
← Cost of capital
Present Value
Future Value
42
(1 + MIRR) =
Future value of all cash in flows
Present value of all cash out flows
Modified Internal Rate of Return (MIRR) II

Method

MIRR is defined as the discount rate that forces the present value of
cash in flows (CIF) to equal the present value of cash out flows (COF).
N
N
Σ
t=0
N-t
Σ
CIFt (1 + r )
t=0
COFt
(1 + r ) t = (1 + MIRR) N
PV of cash out flows =

FV of cash in flows
(1 + MIRR) N
Implication

MIRR is better than IRR because it reinvest the cash-in flow by using
the cost of capital which is more realistic. Thus, MIRR tells more
accurate profitability of the project.


MIRR > Hurdle Rate: the project will produce more cash than the necessary
amount to repay debt and deliver dividend to shareholders.
MIRR is better than IRR because it allows more than one changes in
plus and minus signs in cash flow projection.
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Profitability Index (PI)

Method

PI is another way of using NPV by dividing PV of future cash flow by
initial investment.
N
Generally:
PI =
PV of future cash flows
Initial investment
=
Σ
t=1
CFt
(1 + r) t
CF0
42
For the example cash flow projection:
PI =

Implication

PV of future cash flows
Initial investment
=
Σ
t=4
CFt
(1 + r ) t
3
CFt
Σ
t
t = 0 (1 + r )
PI tells the relative profitability of the project by indicating the value of
the future cash flows par dollar of initial investment. When PI > 1, the
project should be accepted. When PI = 1, this basically means NPV = 0
and MIRR = Hurdle Rate.
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Comparing two projects with NPV and IRR
Project A
Project B
$500
$400
$300
$100
$100
t
-$1000
Cost of capital: 10%
NPV: $78.82 IRR: 14.5%
MIRR: 12.1% PI: 1.08
-$1000
$300
$400
$600
t
Cost of capital: 10%
NPV: $49.18 IRR: 11.8%
MIRR: 11.3% PI: 1.05
NPV
$400
Project B
$300
Crossover rate
$200
$78.82
$49.18
Project A
$100
$0
5%
-$100
A conflict between NPV and IRR when:
(1) Project size differences exist
(2) Timing differences exist
below crossover rate.
10%
7.2%
15%
Take NPV rather than IRR. The logic is
That NPV selects the project that adds
r % most to shareholder’s wealth.
11.8% 14.5%
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Other Important Indicators

Debt service coverage ratio
=

Loan life coverage ratio
=

NPV of FCF during the life of the debt
Outstanding debt
Project life coverage ratio
=

Annual FCF
Annual debt service (principal and interest payments)
NPV of FCF for the entire project life
Outstanding debt
Debt-to-equity ratio
=
Outstanding debt
Outstanding equity
Issues on Cost of Capital I

Decreasing Debt/Equity Ratio

For calculating NPV for a project within a company or for a company’s
valuation, generally WACC (weighted average cost of capital) is used.
CF1
CF2
NPVC = - CF0 + (1 + WACC) 1 + (1 + WACC) 2

CFn
+  + (1 + WACC) n
In case of project finance the outstanding debt constantly declines and
debt/equity ratio keeps changing throughout the project life.
CF1
CF2
CFn
NPVP1 = - CF0 + (1 + WACC1)1 + (1 + WACC2)2 +  + (1 + WACCn)n
in which weight of debt is constantly adjusted
WACC = (weight debt x cost debt)(1 – T) + (weight capital x cost equity)
NOPAT1 + tKDD1
NOPAT2 + tKDD2
or NPVP2 = - CF0 + [1 + (Rf + βa x Rp)] 1 + [1 + (Rf + βa x Rp)] 2 + 
[NOPAT: Net Operating Profit After Tax, t: tax rate, KD: debt cost,
D: debt outstanding, Rf: risk free rate, βa: asset beta, Rp: risk premium]
Tax shield
adjustment
Based on: Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows, Richard S. Ruback, 2000
Issues on Cost of Capital II

Reliability of CAPM in Project Finance Situation

Both NPVP1 and NPVP2 in the previous slide involve the concept of
CAPM (capital asset pricing model) to get debt, equity and asset beta,
which would not work appropriately in case of project finance for several
reasons:








A country where project is located may not have integrated/efficient market
Data would be not available for market risk premium
An ideal instrument represents the risk free rate would not be available
CAPM may not able to incorporate all risks associated with the project
CAPM does not consider asymmetric down side risks
Required return on debt may different between construction and operating
periods
What if there is single purchaser located in other country?
What to do?
Based on: Project Finance, Aditya Agarwal and Sandeep Kaul
3.2 Cash Flow Analysis II
(Individual Cash Flows)
Analysis of Individual Cash Flows
FCF used for NPV
(IRR) analysis
Free
Cash
Flow
(FCF)
Year
Sales
revenue
Anatomy of FCF
for project finance
Year
Input cost
Operating cost
Construciton
costs
Taxes
Net investment
(in maintenance)
Construction I

Construction contracts


Fixed price contract (high premium/low risk, payment based on progress)
Turn-key contract




The contractor accepts full responsibility for delivering a fully operational
facility on a date-certain, fixed price basis.
EPC contract (engineering, procurement, and construction contract)
Cost plus fee contract (low premium/high risk, frequent payments)
Cost plus fee contract with maximum price and incentive fee
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Construction II

Major risks I

Increase in construction cost (cost over-run)



Risk mitigation




Turn-key contract
Contractual undertakings—infusion of additional equity, standby equity
participants, contingency tranche in construction loan, standby cost over-run
funding agreements
Escrow funds, contingency account
Delay in completion




Unavailability of sufficient funds to complete construction
Inability to the project company to pay increased debt service during
operation, even if funded by debt
Increase in construction costs and in debt service costs
Delay in the scheduled flow of revenue to cover debt service and expenses
Breach of project contracts, such as fuel supply or off-take
Risk mitigation


Turn-key contract
Stated milestones tied to construction loan contract
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Construction III

Major risks II

Project performance at less guaranteed levels




Risk mitigation




Breach of off-take contract/decrease in project revenue
Increase in maintenance costs and input/utility costs
Inability to the project company to repay debt
Performance liquidated damage to cover the loss
Third party guarantees such as letter of credit or performance bond
(payment bond), when financially weak contractors
Bid bond/warranty bond/retention bond
Other risks





Site acquisition and construction related facilities
Equipment, building material, and utility supply
Labor/environmental issues
Force majeure risks
Risk mitigation

All risk contractor’s riks insurance
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Off-take Purchase I

Off-take agreements

Take-or-pay contract (a form of unconditional guarantee)


Take-and-pay (a form of conditional guarantee)



the purchaser required to pay for a certain amount (fixed cost) for the
product delivered, when the product meets the contract quality
requirements.
Long-term sales agreements (obligation to purchase)


the purchaser is required to pay for a certain amount (fixed cost), even the
product is not delivered. The rest of the amount (variable cost) will be paid if
the purchaser wants to buy.
typically one- to five-year agreement for the purchase and sale of specified
quantities of the project’s output. The purchaser has the obligation to
purchase the contract quantity only if it is produced and delivered, and meet
the contract quality requirements.
Off-take purchaser’s financial strength
Market for product or service (in the long run)
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Off-take Purchase II

Merchant project (Merchant facility)




Merchant facility is a project finance without off-take contracts
Cash flow fully relies on the market for project output and forecasts of
future market conditions (revealed to market risks).
The analysis of market risk is similar to that used in any business model
(price, supply and demand).
Risk mitigation






Linking inputs and outputs
Reserve funds
Cash calls
Subordination of project costs to debt services
Hedging strategies
The commodity supplier as project partner
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Input

Major risks


Increase in input costs
Risk mitigation






Other issues






Supply-or-pay contract
Fixed amount contract
Requirements contract (cap/floor)
Output contract
Subordination of project costs to debt services
Delay in completion of transportation facilities
Availability of supply
Disruption of transportation
Title and risk of loss
Force majeure
Financial strength of supplier
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Operation

Major risks

Increase in operating costs




Risk mitigation





Performance guarantees (liquidated damage)
Fixed price operation and maintenance contract (very rare)
Cost plus fee operation and maintenance contract
Cost plus fee contract with maximum price and incentive fee
Other risks


Force majeure risks
Risk mitigation


Excessive equipment replacement and unscheduled maintenance
Poor productivity of labors, incorrect assumptions of required labor
Increase in utility costs
All risk operator’s risk insurance
Financial strength of the operator
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Exchange/Interest/Inflation Rate

Currency and exchange risks

Loan agreement




All other agreement



Export and import of equipment, input, out-put, operating costs
Cash flow will be affected depends who takes the risks and covers
Interest rate


Loan disbursements (construction loan and term loan)
Principal repayment and interest repayment
Availability of swap markets
Incorrect interest rate projections can severely affect the ability of the
project revenue to service debt by
Inflation rate


Risk allocation
Cash flow projection
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Collateral I

The “blanket” lien


Project cash flow




A security interest in the cash flows generated by the project under long-term offtake agreements.
Accomplished through a cash collateral account in which off-take purchaser pays
all payments into the account established by the lenders.
Offshore accounts/escrow accounts
Ownership interests



The blanket lien covers all the assets of the project company, including real
(unmovable) and personal (movable), tangible and intangible.
Pledge of ownership interests
Voting trust
Negative pledges

An agreement under which the project company will not create, directly or
indirectly, any security interest, lien or encumbrance in its assets for the benefit
of any other entity.
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Collateral II

Personal (movable) property









Intangible assets
Permits, licenses and concessions
Contracts
Insurance proceeds
Surety bonds
Guarantees
Liquidated damages
Political risk insurance
Accounts

Disbursement agreement
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Collateral III



Review the contracts to verify that they are each assignable under the
country’s law.
In the event of a foreclosure, the contracts will only have value to the lender
if they can be assumed by the lender and later assigned to a purchaser of
the project.
Other issues






Types of liens allowed
Local formalities
Denomination of lien in local currency
Priority of lien (perfection)
Enforcement
Foreclosure
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Equity and Dividneds

Timing and certainty of equity contribution


A part of equity contributions to the project company may be planned
after the financial closing. Some funds may be injected with construction
draw-downs, or await investment until project completion.
Risk mitigation



Condition precedents in loan agreement
Covenants in loan agreement
Some conditions for dividend payments

Requirement to replenish before dividend payments



Reserve (contingent) account
Off-shore account
Financial covenants: a financial covenant limiting the dividend payments
to a certain level
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
Permit/License/Concession

Status




Permits already obtained and in full force and effect
Permits routinely and mandatorially granted on application and fulfillment
of applicable criteria and that would not normally be obtained before
construction (before loan agreement)
Other than above
Risks





Unable to operate/termination of project
Damage payments
Different policies between central and local governments
Permit vocation, additional permit requirements
Risk mitigation

Integrated management of all necessary permits: apply, obtain, maintenance,
renew processes
Based on: The Law and Business of International Project Finance, Scott L. Hoffman, 2001
3.3. Stress Testing/Simulation
Basics of Risk Analysis Techniques I

Three stages of risk analysis techniques
1.
2.
3.
Sensitivity Analysis: a linear relation between a cash flow factor and
NPV
Scenario Analysis: estimate probabilities of each individual cash flow
on the basis of base-case, best-case, and worst-case scenario, which
in turn provides mean and standard diviation of NPV
Monte-Carlo Simulation: obtain expected NPV and standard deviation
from randomly selected scenarios based on the probability distribution
of each cash flow factors
Sensitivity Analysis I

Method

Sensitivity analysis is a risk analysis technique that tells how
much NPV will change in response to given changes in one cash
flow factor with other factors held constant.
NPV ($)
NPV when unit sales price
goes up by 15%
Unit sales price
NPV based on the originally
estimated unit sales price
$0
NPV when unit sales price
goes down by 20%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Deviation from Base-Case Value (%)
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Sensitivity Analysis II


The slopes of the lines indicate how sensitive NPV is to changes in
each individual cash flow.
Relatively small error in estimating individual cash flow with steeper
slope leads to a large error in estimating project’s NPV.
Unit sales price
NPV ($)
Estimated values of cash
flow factors
Price growth rate
Sales quantity
Original NPV
value
Asset beta
$0
Utility price
Input price
Operating costs
Construction costs
NPV breakeven
analysis
Input price growth
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Deviation from Base-Case Value (%)
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Sensitivity Analysis III

Implication


Weak Points



Sensitivity analysis is a powerful technique to understand which factors
need to be more accurately examined to reduce the entire credit risk.
Sensitivity analysis does not incorporate a concept of probability
It can deal with only one cash flow for each analysis
NPV Breakeven Analysis

NPV breakeven analysis examines a value of each factor which makes
NPV exactly zero.
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Scenario Analysis I

Method

Scenario analysis examines a set of scenarios under tha
assamption that each scenario occurs with a certain probability




Example 1: sales price would drop by 6% with 25% probability for
worst case scenario.
Example 2: operating cost would be reduced by 2% with 25%
probability for best case scenario.
Then obtain base-case, best-case, and worst-case NPV and
calculate mean NPV and standard deviation to (roughly)
estimate the magnitude of the risk inherent to the project.
Implication

Scenario analysis is very useful technique to grasp the worst
case situation of the project (by assuming 1.0 correlation).
Based on: Financial Management, Eugene F. Brigham and Michael C. Ehrhardt, 2008
Scenario Analysis II

Simplified illustration of scenario analysis process
Excel
Sheet
Base-, best-, and worst-case
scenarios of each cash flow

Slot in all base-, best-,
and worst-case scenarios
of each cash
Expected NPV
(mean value)
Standard Deviation
of NPV
Projected NPVs on the basis of the three scenarios
Probability (%)
50%
40%
30%
FCF from basecase scenario
FCF from worst- 20%
case scenario 10%
FCF from bestcase scenario
$0
NPV ($)
Mean value
Monte Carlo Simulation

Simplified illustration of monte-carlo simulation process
NPVs probability
Distribution
Expected NPV
(mean value)
Probability distribution of each cash
flow and correlations between them

Randomly picking up
scenarios
Standard Deviation
of NPV
Simplified illustration of probability distribution of NPVs
Probability (%)
10%
8%
6%
4%
2%
$0
NPV ($)
4. Credit Risk Management
(Political Risks)
Mechanism of Political Risks for PF
Irreversible
Investment
Weaker
negotiating
power
A large
standing out
asset
Easily attract
people’s
attention
• Political shift
• Corruption
• Violation of law
• High profit
• Rival company
Political
interest
Civil
movement
Potential
foreign
exploitation
Natural
resources/
infrastructure
Potentially
high utility bills
Creeping
expropriation
Trigger
Civil
interest
War/civil
disturbance
Outright
Potential
environmental
damage
• Natural disaster
• Environmental problem expropriation
• Increased input costs
• Inefficient operation
• International relation
Useful Documents

Project Fiannce: Introductory Manual on Project Finance for Managers of PPP
Projects, National Treasury, South Africa



Tools for Project Evaluation, Nathaniel Osgood, 2004



Detailed and clear explanation on time value of money, the concept of discounting, and NPV and
IRR methods, with cases. (41 slides)
Available at: http://ocw.mit.edu/NR/rdonlyres/Civil-and-Environmental-Engineering/1-040Spring2004/ABF26C4A-8572-498D-ACE3-98D2E8AD0685/0/l3prj_eval_fina2.pdf
Thought process during the project initiation pahse, H. Griesel, 2004



Although this document is prepared for public-private partnership (PPP) managers, it provides a
good overview of project finance credit analysis, by addressing the general structure of a project,
funding alternatives, investor profiles, and the criteria investors will consider. Also, it contains
good illustrations for cash flow analyses. (46 pages)
Available at:
http://www.finint.ase.ro/Masterate/Masterat_Alexandra/Bibliografie/Project_Finance_Manual.pdf
An excellent summary of project finance risks in the mining sector. (6 pages)
Available at: http://www.platinum.org.za/Pt2004/Papers/237_Griesel.pdf
Glossary of Project Finance Terms, Foster Wyatt Training, 2003


Useful glossary for project finance. (12 pages)
Available at: http://www.fosterwyatt.com/filesdownload/HNDOUT39.pdf