Project finance funding

209-Sangeeta
217 Pranav Gheewala
218 Dhiraj Hegde
219 Surbhi Jain
225 Prakash Kumavat
238 Lalit Mishra
256 Ashish Poojary
260 Soujanya Rao
275 Shruti Thavara
283 Akash Yagnik
Project Finance funding
Why is it important to understand project
finance?

The people involved in a project are used to find financing deal for major construction projects
such as mining, transportation and public utility industries, that may result such risks and
compensation for repayment of loan, insurance and assets in process.
That’s why they need to learn about project finance in order to manage project cash flow for
ensuring profits so it can be distributed among multiple parties, such as investors, lenders and
other parties.
For whom is it important to understand
project finance?
Financial managers
 Sponsors
 Lenders
 Consultants and practitioners
 Project managers
 Builders
 Suppliers
 Engineers.
 Researchers
 Students.
What is a Project?
A Project is normally a long-term infrastructure, industrial or public services scheme,
development or undertaking having:

 large size.
 Intensive capital requirement – Capital Intensive.
 finite and long Life.
 few diversification opportunities i.e. assets specific.
 Stand alone entity.
 high operating margins.
 Significant free cash flows.

Such projects are usually government regulated and monitored which are allowed to an entity
on B.O.O or B.O.T basis.
Types of Project
Motorway and expressway.
 Metro, subway and other mass transit systems.
 Dams.
 Railway network and service – both passenger and cargo.
 Power plants and other charged utilities.
 Port and terminals.
 Airports and terminals.
 Mines and natural resource explorations.
 Large new industrial undertakings – [no expansion and extensions.
 Large residential and commercial buildings.
Key characteristics of Project Financing.
The key characteristics of project financing are:
 Financing of long term infrastructure and/or industrial projects using debt and equity.

 Debt is typically repaid using cash flows generated from the operations of the project.

 Limited recourse to project sponsors.

 Debt is typically secured by project’s assets, including revenue producing contracts.

 First priority on project cash flows is given to the Lender.
 Consent of the Lender is required to disburse any surplus cash flows to project
sponsors
 Higher risk projects may require the surety/guarantees of the project sponsors.
Project Funding
Sources of short term project finance
Overdraft
Loans
Sources of long term project finance
Sale and leaseback
Loan capital
Debentures
Business Angels
Venture Capital
Share capital
Retained profits
Issuing shares
Private finance initiative
Project Grants and funding
Types of funding
Advantages of Project Financing.
 Eliminate or reduce the lender’s recourse to the sponsors.
 Permit an off-balance sheet treatment of the debt financing.
 Maximize the leverage of a project.
 Avoid any restrictions or covenants binding the sponsors under their respective financial
obligations.
 Avoid any negative impact of a project on the credit standing of the sponsors.
 Obtain better financial conditions when the credit risk of the project is better than the credit
standing of the sponsors.
 Allow the lenders to appraise the project on a segregated and stand-alone basis.
 Obtain a better tax treatment for the benefit of the project, the sponsors or both.
Disadvantages of Project Financing.
 Often takes longer to structure than equivalent size corporate finance.
 Higher transaction costs due to creation of an independent entity. Can be up to 60bp
 Project debt is substantially more expensive (50-400 basis points) due to its non-recourse
nature.
 Extensive contracting restricts managerial decision making.
 Project finance requires greater disclosure of proprietary information and strategic deals.
Stages in Project Financing.
 Project identification
 Risk identification & minimizing Pre Financing Stage
 Technical and financial feasibility

 Equity arrangement
 Negotiation and syndication Financing Stage
 Commitments and documentation
 Disbursement.

 Monitoring and review

 Financial Closure / Project Closure Post Financing Stage
 Repayments & Subsequent monitoring.
Stages in Project Financing – Project
Identification.

Identificationof the Project

 Government announced
 Self conceived / initiated

 Identificationof market
 Product of the project
 Users of the product
 Marketability of the product
 Marketing Plan
Stages in Project Financing – Risk
Identification and Minimizing.
Risk Solution
Completion Risk Contractual guarantees from contractors,
manufacturer, selecting vendors of repute.
Price Risk hedging
Resource Risk Keeping adequate cushion in assessment.
Operating Risk Making provisions, insurance.
Environmental Risk Insurance
Technology Risk Expert evaluation and retention accounts.
Interest Rate Risk Swaps and Hedging
Insolvency Risk Credit Strength of Sponsor, Competence of
management, good corporate governance
Stages in Project Financing – Risk
Identification and Minimizing.
Currency Risk Hedging
Political and • Externalizing the project company by forming
Sovereign Risk it abroad or using external law or jurisdiction
• External accounts for proceeds
• Political risk insurance (Expensive)
• Export Credit Guarantees
• Contractual sharing of political risk between
lenders and external project sponsors
• Government or regulatory undertaking to
cover policies on taxes, royalties, prices,
monopolies, etc
• External guarantees or quasi guarantees
Stages in Project Financing – Technical and
Financial Feasibility.

 Technical feasibility
 Location
 Design
 Equipment
 Operations / Processes.

 Financial feasibility
 Business plan / model
 Projected financial statements with assumptions
 Financing structure
 Pay-back, IRR, NPV etc
Stages in Project Financing – Equity
arrangement.

 Sponsors
 Lead sponsors
 Co – sponsors

 Private equity participation

 Angel investors – Private equity funding
 Financial institutions
 Non-financial institutions.
Stages in Project Financing – Negotiation and
syndication.
Lenders
 Banks.
 Non- banking financial institutions.
 International lending institutions.

 Syndication
 Lead arranger.
 Co-arrangers.

Negotiation
 Pricing.
 Documentation.
 Disbursement.
Stages in Project Financing – Negotiation and
syndication.
Lenders
 Banks.
 Non- banking financial institutions.
 International lending institutions.

 Syndication
 Lead arranger.
 Co-arrangers.

Negotiation
 Pricing.
 Documentation.
 Disbursement.
 Stages in Project Financing – Documentation.
Commitment letters / MOUs
 Commitment letters from sponsors and investors
 MOU signing with financiers.

 Documents
 Offer Letters
 Lending agreements
 Security documents
 Disbursement plan

 Contracts
 Management/shareholder agency relationship
 Inter corporate agency relationship
 Government/corporate agency relationship
 Bondholder stockholder relationship
Stages in Project Financing – Disbursement.

Equity Disbursement
 Shares application.
 Shares proceeds.
 Share certificates.

 Loan Disbursement
 Sponsor loans
 Advance payments
 Progress Payment
 Stages in Project Financing – Documentation.
Commitment letters / MOUs
 Commitment letters from sponsors and investors
 MOU signing with financiers.

 Documents
 Offer Letters
 Lending agreements
 Security documents
 Disbursement plan

 Contracts
 Management/shareholder agency relationship
 Inter corporate agency relationship
 Government/corporate agency relationship
 Bondholder stockholder relationship
Conclusion – A Typical Project Finance
Structure.
Thank you