2. Overview
Stages of Project Financing
Sources of financing
Participants and Criteria
Principal Agreements
Project risk
Additional problem areas
Risk Identification – Due Diligence
Principal Agreements
Risk management
3. “Project is an approval for a capital
investment to develop facilities, and provide
goods and services.”
- World Bank.
Project finance is financing of a facility in
which a lender looks principally to the cash
flow generated by the operation of the
project for the source of funds from which its
loan will be repaid.
4. Creation of a separate project entity
Very high debt component
Cash flows are separated
Debt services depend on project cash
flows
Appropriate for projects with high capex
and risk
Insulate company’s balance sheet from
impact of project
5. Merits
Non Recourse
Maximize Leverage
Off-Balance-Sheet
Maximize Tax Benefit
Demerits
Extremely Complex
High Costs
More Risk assumed by lenders
Cost of Capital greater than Traditional
Finance
6.
7. Equity
Developmental loan
Subordinated loan
Senior debt
Syndicated loan
World bank group financing source
Bonds
Investment funds
Institutional lenders
Host government
8. Sponsor/Equity investor/Developer and
additional equity investors
Equipment Supplier
Construction Contractor
Operations and Maintenance Contractor
Product off takeover
Lender
Equipment, Electricity and Fuel Supplier(Power
sector)
10. The key objectives of financial management would
be to:
• Create wealth for the business
• Generate cash, and
• Provide a return on investment keeping in mind
the risks that the business is taking and the
resources invested
11. There are three primary elements to the
process of financial management
1) Financing Planning
2) Financial Control
3) Financial Decision Making
12. The Payback Period
• Advantages of Payback Period:
• Disadvantages of payback period:
Net Present Value
• Advantages of the net present value method:
The Discounted Payback Period
13. Construction Contract
Project Description
Price
Payment
Completion Date
Performance Guarantees
14. Feedstock Supply Agreements
Product Off Take Agreements
Operations and Maintenance Agreement
15. Loan and Security Agreement
Disbursement Controls
Progress Reports
Covenants Not to Amend
Completion Covenants
Dividend Restrictions
Debt and Guarantee Restrictions
Financial Covenants
Subordination
Security
17. Full Recourse to Non Recourse
Experts Reports
Release of Cash Flow
Accelerated Debt Service
Lender Liability
Removal of Limited Recourse
Abandonment
Insurance Requirements
Intercreditor Issues
18. Due Diligence is an analysis and appraisal
of an entity in preparation for establishing a
relationship with that entity which involves
business risk.
Objectives:
Look for overvalued assets/under recorded
liabilities
Look at the quality of management
Look at Tax structure and its impact
Review projected cash flow