The liberal art of project finance

Publication | December 2017

By John L. Schuster, with JLS Capital Strategies LLC in Washington

For many of us, the Thanksgiving and upcoming winter holiday break mean the return of children from college and, at our house, opportunities for greatly appreciated parental guidance on the value of the liberal arts educations children are receiving.

Actually, guidance may be less than fully appreciated. To those who are steeped in coursework on literature, philosophy, history, language, quantitative reasoning, and other enjoyable but seemingly impractical pursuits, it all seems theoretical: just another set of parental lessons to be filed away.

For once, mom and dad may be right. Critical thinking, logical reasoning and writing are extremely valuable in the business world. Studies show that philosophy majors wind up doing very well in their later professional lives. But to those who see all the paying jobs going to computer science and engineering majors, the value of liberal arts in the real world outside of academia seems far away.

There are many reasons why guidance receives only lip service. First, it comes from dad, always a questionable resource. He’s the one who recounted ancient teachings that, like “W” is sometimes a vowel, are a source of ridicule among family and friends and now among NewsWire readers and, for the record, dad never said “W” was a vowel, just that his Cincinnati public schools taught him that it was in diphthongs such as “ow” and “aw”. But that’s another story. Movie themes also don’t help, as the only film focusing on liberal arts –- the 2012 Josh Radnor film Liberal Arts — has as part of its happy, redemptive ending, the liberal-arts-educated Jesse Fisher (Josh Radnor) continuing his book store job, hardly a helpful career life lesson. The only other movie character extolling the virtues of a classical education is Die Hard villain Hans Gruber.

To be fair, parental guidance is being heard, just not about how liberal arts may apply to the business and finance professions the parents have chosen. To those practitioners and their children reading this article with liberal arts educations who can learn, or have learned, to appreciate the joys of project finance, this article is for you. Taking as a basis the core curriculum of my own Georgetown liberal arts education, this article is a presentation of how classic liberal arts subjects can feature prominently in an exciting life in project finance.

Philosophy: the existential truth

Let’s start with a big challenge — philosophy and theology — hardly a subject in any MBA program.

Existentialism is never discussed in any case study group at business school or in real life, and no one ever impresses someone at a job interview by recounting its core concept: “existence precedes essence.” But that concept is critical. Whereas classical philosophers like Plato and Aristotle conversely taught that essence comes first, that people and things strive to achieve their preceding essence — chairs strive to be chairs — people should strive to find their natural law essence. Existentialism teaches us that there is no preceding, defining essence and that we should all create our own existential way forward.

Applying the Heraclitus adage about not being able to put one’s foot in the same river twice, no two project finance deals are the same and deals are constantly changing.

What’s more, there is no need to make deals conform to some ideal by imposing uniform terms and conditions. Lending terms do not have to follow any laws, natural or otherwise, and seeking to force deals into a mold just gets in the way of finding workable outcomes. Dictating a fixed debt-equity ratio or a debt coverage ratio without considering a project’s characteristics is never persuasive. More importantly, imposing precedent terms uniformly can prevent deal makers from achieving the end goal of structuring a viable deal and achieving the win for both sides. Having a manageable amount of debt and leverage is all about preventing a borrower from carrying an excessive debt burden that will become troublesome for a particular project based on its contracts, costs and market conditions.

How to find the correct solution for a specific project finance deal is akin to finding its truth, something that can really only be achieved through inquisitive due diligence and constructive negotiation. This is a chance to apply another theological construct — Gandhi’s Satyagraha — taught, among other places, at Father Francis Winters’ old class at Georgetown. Satyagraha is the insistence on truth, and for Gandhi, one only arrives at the truth through creative conflict with others. Gandhi’s better-known philosophy of non-violence is actually secondary to the insistence on truth. Because the truth only emerges from all of us, killing someone destroys the truth.

Negotiation in project finance and other business deals is only really effective when all parties work together to solve the problems of the deal. Both sides need to listen and focus on their mutual interests and jointly formulate solutions. Strong-arming and forcing a point upon another is akin to killing the truth of a viable and mutually agreeable deal, leading to a fragile deal that will fall apart and ultimately serve no one’s interest.

Simple math

Let’s pick an easier subject next — math and science –- obviously part of every project finance deal, but a topic with deeper lessons.

Many schools now allow math requirements to be met not just through calculus or statistics, but also through more abstract quantitative reasoning courses. Suppressing my father’s math genes, I am okay with this, as the subject’s real value is not just how to structure a spreadsheet model or apply calculus to dynamic economic or physical relationships, but also how to understand relationships and distill them into an easy to understand set of data points. Even those of us with coursework in calculus, statistics, operations research and applied economics rarely use all of that math on a daily basis. The more important skill is understanding, distilling and applying basic mathematical relationships to real-life problems.

Before developing or applying any financial or mathematical model, one should first derive a logical and understandable result through simple math.

What are the overall capital costs of a project and what are its ongoing operating costs? How much equity is available and how much debt is needed? What can go wrong and how much buffer or contingency is needed? What are the expected project cash flows? Are they sufficient to cover ongoing costs? Debt? Even a huge financial model can be reduced to a few key numbers. If that does not work, tinker a bit and only then should one proceed with the larger model. Anything else misses the bigger picture and is a waste of time.

Lit majors and the documents

Math was too easy, so let’s pick a much tougher one. English, and in my case also French literature, are subjects that even Lit majors never really enjoyed, although they might say they did. Looking behind the choices of words used and the meter of a stanza, researching an author’s background and prior work and applying that to every single passage of a literary work can be tedious or even dreadful. Anyone who has spent several classes analyzing Baudelaire’s description of a nut cake rues every minute spent doing so, and never thinks such an exercise could ever be useful in the real world. But the exercise is useful, and the lawyers publishing and reading the NewsWire know that it is.

Language in a project finance agreement or any legal document, is everything.

Whether a provision is governed by consents, event of default provisions, or force majeure can be critical. How a term is defined and where it is used or not can affect an entire agreement. Those who fail to understand this wind up agreeing to things they do not understand and face disappointment once an agreement is placed into actual use, especially when specific unforeseen issues arise and interpretation is needed.

One can learn much of this in law school, but that does not help those without formal legal training. Even lawyers can capture the spark of the importance of language from their early Lit classes as their inspiration to achieve excellence.

Foreign language requirement

Most schools still have a foreign language requirement, which is of course very useful for speaking to colleagues and counterparties in a foreign language. But even those of us who speak several languages to varying levels of proficiency may not use those skills often in a business world where English has become the de facto Esperanto. What’s the use? Why maintain the requirement?

The answer is simple. The requirement is very useful. Foreign language training expands how one sees everything – our own language, other people, different cultures, opposing perspectives — everything. The exercise of learning one language makes learning another language easier and increases knowledge and appreciation of one’s own language.

In international deals or in any deal involving those from other countries, the most difficult counterparties who are the least likely to be open to creative solutions are those who have never made serious efforts to learn another language or culture.

History lessons

History is often considered the quintessential impractical subject, especially if that history is a long time ago.

But the abiding lesson of history is always critical, as it is about how people once lived and thought about the world, how they experienced triumph or difficulties, and then changed or failed to change over time. Things were not always as they were and as they are now. A mentor of mine once put on his wall that “Santayana was right.” George Santayana is famous for saying that those who do not learn history are doomed to repeat it.

In the financial world, those lessons are obvious but always repeated: just look at the Tulip Bulb Crisis of the 1630s and compare that to the Credit Default Swaps and the resulting Global Financial Crisis of 2008. But the lessons are deeper, both more recent and more distant. Lebanon’s surprising descent into chaos is the historical event behind the theory of Black Swan events that Taleb popularized in his 2008 work.

The key to learning from history is to think expansively and to protect oneself from the Black Swans that no one fathoms can happen. Looking back at what could have been done to prevent or reduce the impact of historical events is the key to fashioning solutions for today’s problems. With this knowledge, we can find the adjustments and modifications that may turn monumental events to ordinary occurrences. The way to do this is to integrate disciplines and incorporate the teachings of Satyagraha and explore solutions with others through negotiation.

Responsible life learning

All of this leads to the fundamental value of a liberal arts education: to learn from others but to think critically and independently for oneself.

Whether one embraces existentialism or not, a liberal arts education teaches one to take personal responsibility to learn constantly and to think for oneself.

In a project finance deal, this means understanding all of the aspects of a project and to learn how to listen and learn from others, including those on the other side of the table. To put the lesson in elementary and popular terms, one can be taught that “W” is a vowel in school and still remember that lesson, but learn to rise above it.

The Jesse Fishers of the world can find redemptive business relationships, not just personal ones. Maybe the Hans Grubers could even learn not to destroy the truth in the Takagis and Ellises of the world and make better “million-dollar deals for breakfast” and other times as well.


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