What is Project Financing

7/27/2019 What is Project Financing

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Project Financing:Chapter OneAraffy Meidy Rizky 13409001

Annisa Shinantya 13409006

Muthia Astari 13409011







What Is Project Financing?

Project financing can be arranged when a particularfacility or a related set of assets is capable offunctioning profitably as an independent economic unit

Although project financings have certain commonfeatures, financing on a project basis necessarilyinvolves tailoring the financing package to thecircumstances of a particular object




Project financing may be defined as the raising of funds

to finance an economically separable capital investment project in which the providers of the fundslook primarily to the cash flow from the project as thesource of funds to service their loans and provide thereturn of and a return on their equity invested in theproject






In a project financing, the sponsors provide, at mostlimited recourse to cash flows from their other assetsthat are not part of the project

Project financing is not a means of raising funds tofinance a project that is so weak economically that itmay not be able to serice its debt or provide anacceptable rate of return to equity investors

Project financing is not a means of financing a projectthat cannot be financed on a conventional basis







Project financing requires careful financial engineerngto allocate risks and rewards among the involved partiesin a manner that is mutually acceptable

At the center is a discrete asset, a separate facility, or arelated set of assets that has a specific purpose. Thisgroup of assets must be capable of standing alone as aindependent economic unit




The operations must be organized so that project hasthe ability to generate sufficient cash flow to repay itsdebts

Project financing can be beneficial to a company with aproposed project when:

1. The project’s output would be in such strong demand

that purchasers would be willing to enter into long-termpurchase contrcts

2. The contracts would have strong enough provisions thatbancks would be willing to advance funds to financeconstruction on the basis of the contracts









REQUIREMENTS for PROJECTFINANCING

A project has no operating history at the time of the initial debtfinancing

Lenders require assurances that :

1. The project will be placed into service2. Once operation begin, the project will constitute an

economically viable undertaking







Availability of Raw Materials and Capable Management

1. The quantities of raw materials must enable it to produce and sellan amount of output that ensures servicing of the project debt in atimely manner

2. Unless the project entity directly owns its raw materials supply,adequate supplies of these inputs must be dedicated to the projectunder long-term contracts

3. The term of the contracts with suppliers cannot be shorter than theterm of the project debt.













EXAMPLE The Industrial User

Chemical Company is willing to enter into a steam purchaseagreement to a term not more than 15 years, nor will it invest anyof its own funds or take any responsibility for arranging financing forthe facility. Chemical Company is insistent that the steam purchasecontract must obligate it to purchase only the steam that is actuallysupplied to its plant.

Outside Financing Sources

The balance of the equity and all of the long-term debt for the projectwill have to be arranged from passive sources, principally institutionalequity investors and institutional lenders. The equity funds will have tobe invested before the long-term lenders will fund their loans. Thestrength of the electric power purchase and gas supply agreements willdetermine how much debt the Cogeneration Project will be capable ofsupporting. The availability of the tax benefits of ownership, as well asthe anticipated profitability of the project, will determine how muchoutside equity can be raised for the project.



CONCLUSION

Project financing involves raising funds on a limited-recourse or nonrecourse basisto finance an economically separable capital investment project by issuingsecurities (or incurring bank borrowings) that are designed to be serviced andredeemed exclusively out of project cash flow.

The terms of the debt and equity securities are tailored to the characteristics ofthe project.

For their security, the project debt securities depend mainly on the profitability ofthe project and on the collateral value of the project’s assets.

Depending on the project’s profitability and on the proportion of debt financingdesired, additional sources of credit support may be required.

A project financing requires careful financial engineering to achieve a mutuallyacceptable allocation of the risks and rewards among the various parties involvedin a project.

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What is Project Financing