Project Finance1

7/31/2019 Project Finance1

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Muhammad KAMRAN FCA.


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Objectives

To understand what project financing is and

what steps are involved in securing and

managing it.


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Part 1

IntroductionFor whom is it important to understand project financing?

Why is it important to understand project financing?

What is a project?

Types of projects.What is project financing?

Key characteristics of project financing.

Advantages of project financing.

Disadvantages of project financing.


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Introduction For whom is it important to

understand project finance? Financial managers

Sponsors

Lenders

Consultants and practitioners Project managers

Builders

Suppliers

Engineers.

Researchers Students.


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Introduction 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 inprocess. Thats 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.


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Introduction What is a Project?

A Project is normally a long-term infrastructure, industrial orpublic 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 monitoredwhich are allowed to an entity on B.O.O or B.O.T basis.


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Introduction 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.


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Introduction What is Project Financing?

International Project Finance Association (IPFA) defined projectfinancing as:

The financing of long-term infrastructure, industrial projects

and public services based upon a non-recourse or limited

recourse financial structure where project debt and equity used

to finance the project are paid back from the cash flows

generated by the project.

Project finance is especially attractive to the private sector

because they can fund major projects off balance sheet.


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Introduction Key characteristics of ProjectFinancing.

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 projects 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 surpluscash flows to project sponsors

Higher risk projects may require the surety/guarantees of

the project sponsors.


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Introduction - Advantages of Project

Financing. Eliminate or reduce the lenders 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 sponsorsunder 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.


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Introduction Disadvantages of Project

Financing. Often takes longer to structure than equivalent size

corporate finance.

Higher transaction costs due to creation of an independententity. Can be up to 60bp

Project debt is substantially more expensive (50-400 basispoints) due to its non-recourse nature.

Extensive contracting restricts managerial decision making.

Project finance requires greater disclosure of proprietaryinformation and strategic deals.


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Part 2

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.


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Stages in Project Financing Project

Identification.Identification of the Project

Government announced

Self conceived / initiated

Identification of market

Product of the project

Users of the product

Marketability of the product

Marketing Plan


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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


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Currency Risk Hedging

Political and

Sovereign Risk

Externalizing the project company by forming

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 Risk

Identification and Minimizing.


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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 Technical

and Financial Feasibility.


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Stages in Project Financing Equity

arrangement.Sponsors

Lead sponsors

Co sponsors

Private equity participation

Angel investors Private equity funding

Financial institutions

Non-financial institutions.


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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.


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Stages in Project Financing

Documentation. Commitment letters / MOUs

Commitment letters from sponsors and investorsMOU signing with financiers.

Documents Offer Letters Lending agreements Security documents Disbursement plan

ContractsManagement/shareholder agency relationshipInter corporate agency relationshipGovernment/corporate agency relationshipBondholder stockholder relationship


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Stages in Project Financing

Disbursement. Equity Disbursement

Shares application.

Shares proceeds.

Share certificates.

Loan Disbursement

Sponsor loans

Advance payments

Progress Payment


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Stages in Project Financing Monitoring

and Review Why?

Project is running on schedule

Project is running within planned costs.

Project is receiving adequate costs.

How?

First hand information.

Project completion status reports.

Project schedule chart. Project financial status report.

Project summary report.

Informal reports.


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Stages in Project Financing Financial

Closure / Project ClosureFinancial closure is the process of completing all project-relatedfinancial transactions, finalizing and closing the project financial

accounts, disposing of project assets and releasing the work site.

Financial closure is a prerequisite to project closure and the PostImplementation Review (PIR). A project cannot be closed until all

financial transactions are complete, otherwise there may not be

funds or authority to pay outstanding invoices and charges.

Financial closure establishes final project costs for comparison

against budgeted costs as part of the PIR. Financial closure also

ensures that there is a proper disposition of all project assets

including the work site.

Project closure and commencement take place after financial

closure.


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Stages in Project Financing Repayment

& Subsequent Monitoring Repayments

Grace period.

Monthly installment.

Quarterly installments. Dividends

Monitoring?

Appointment of directors and managers.

Management meetings. Board meetings.


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Part 3

Conclusion. A typical project financing structure.

Highlights of project financing structure.


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Conclusion A Typical Project Finance

Structure.


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Conclusion Highlights of Project

Financing Structure. Independent, single purpose company formed to build and

operate the project.

Extensive contracting

As many as 15 parties in up to 1000 contracts. Contracts govern inputs, off take, construction and

operation.

Government contracts/concessions: one off or operate-

transfer.

Ancillary contracts include financial hedges, insurance for

Force Majeure, etc.


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Conclusion Highlights of Project

Financing Structure. Highly concentrated equity and debt ownership

One to three equity sponsors.

Syndicate of banks and/or financial institutions providecredit.

Governing Board comprised of mainly affiliated directorsfrom sponsoring firms.

Extremely high debt levels

Mean debt of 70% and as high as nearly 100%.

Balance of capital provided by sponsors in the form ofequity or quasi equity (subordinated debt).

Debt is non-recourse to the sponsors.

Debt service depends exclusively on project revenues.

Has higher spreads than corporate debt.


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Thank You.