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Project Finance vis-à-vis Corporate Finance

Advantages of Project Financing

Strategic Differentiation and Mile stone based Roadmap

Project Finance

There are many things to consider in project finance. This section  will learn about a few important concepts and the parties involved in  the process.

Project Development: Project development is an  important concept in project finance. As financing is done on the  sequential progress of the project, understanding project development is  important. There are three stages in project development –

  • Pre-bid stage
  • Contract negotiation stage
  • Money-raising stage

Parties Involved: There are many parties involved in project finance. Let’s look at all these parties in brief 


  • Sponsors: People who sponsor the project.
  • Lender: Financial institutions that lend money for the project.
  • Financial advisors: They help the parties to understand how much return on investment they can make. They can be on both sides – lenders or borrowers.
  • Technical advisors: Often for effective execution of the project, technical consultants are hired. They act as technical advisors for the project.
  • Legal advisors: As the name suggests, they help in legal matters.
  • Debt Financier: People who give secured loan for the project on the basis of project assets.
  • Equity Investors: People who invest the money in lieu of shares.
  • Regulatory agencies: Generally, government authorities who take care of the regulations in regard to the project intricacies.
  • Multilateral agencies: The agencies are part of the World Bank group.


Financial Model: The sponsor who will invest in the  project needs to know how the project will do. Thus they take the help  of an expert to do the financial modeling to understand how the project may go in the future. He will also get an  idea of how much projected cash-flow he can expect. On the basis of  that, he will decide to invest. Actually, the financial model is a  spreadsheet that is being used for calculating the financial model.


Document required: There are a few documents that are of utter importance. Let’s have a look at them –

  • Shareholder/sponsor documents
  • Finance documents
  • Project documents
  • Regulatory Compliance documents


Pre-requisites :

  1. Secure Offtaker agreement ( Pre production purchase order from the assured buyer )
  2. Feedstock agreement ( Pre production purchase order to the supplier/vendor of raw for assured supply of raw material 
  3. Healthy Balance Sheet of the Project Owner 
  4. The SPV is formed between the Bank, Project Owner, Offtaker and the Feedstock supplier 
  5. No hard asset is hedged as collateral 
  6. No Margin Money Required as the whole funding is provided as debt 
  7. The project is risk rated by International Rating Agency 
  8. The funds are underwritten by an International Insurance Agency of choice of the Senior Lender 
  9. Senior lender participates in the SPV to monitor the deployment of the funds 
  10. The interest rates varies from 3%-6%depending on the risk of the project 
  11. The funding is done through Foreign Direct Investment Route and the currency of payment can be in $USD or €Euro or  £GBP 
  12. 42% of the net revenue is retired as debt and tenor is calculated backwards up to 7-10-15-20 years 3.m Bullet payment without penalty is allowed 
  13. Senior lender, Bank and all the other stake holders except the Project Owner exit the SPV after the retirement of Debt 


Project Finance Terminology

know your Project Finance

 

What Is Project Finance?  

Project finance is the funding (financing) of long-term infrastructure,  industrial projects, and public services using a non-recourse or limited  recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project. 

Project financing is a loan structure that relies primarily on the  project's cash flow for repayment, with the project's assets, rights,  and interests held as secondary collateral. Project finance is  especially attractive to the private sector because companies can fund  major projects off-balance sheet (OBS). 

 

Key Takeaways


  • Project finance involves the public funding of infrastructure and other long-term, capital-intensive projects.
  • This often utilizes a non-recourse or limited recourse financial structure.
  • A debtor with a non-recourse loan cannot be pursued for any additional payment beyond the seizure of the asset.
  • Project  debt is typically held in a sufficient minority subsidiary not  consolidated on the balance sheet of the respective shareholders (i.e.,  it is an off-balance sheet item).


Understanding Project Finance  


The project finance structure for a Design, Finance, Build, Own, Operate Manage and/or Transfer (DFBOOM/T) project includes multiple key elements. 


Project finance for DFBOOM/T projects generally includes a Special Purpose Vehicle (SPV). The  company’s sole activity is carrying out the project by subcontracting  most aspects through construction and operations contracts. Because  there is no revenue stream during the construction phase of new-build  projects, debt service only occurs during the operations phase. 

    

For this reason, parties take significant risks during the construction  phase. The sole revenue stream during this phase is generally under an offtake agreement or power purchase agreement. Because there is limited or no recourse to  the project’s sponsors, company shareholders are typically liable up to  the extent of their shareholdings. The project remains  off-balance-sheet for the sponsors and for the government. 

  

Not all infrastructure investments are funded with project finance.  Many companies issue traditional debt or equity in order to undertake  such projects.


Off-Balance Sheet Projects  


Project debt is typically held in a sufficient minority subsidiary not  consolidated on the balance sheet of the respective shareholders. This  reduces the project’s impact on the cost of the shareholders’ existing  debt and debt capacity. The shareholders are free to use their debt  capacity for other investments. 


To some extent, the government may use project financing to keep project  debt and liabilities off-balance-sheet so they take up less fiscal  space. Fiscal space is the amount of money the government may spend  beyond what it is already investing in public services such as health,  welfare, and education. The theory is that strong economic growth will  bring the government more money through extra tax revenue from more  people working and paying more taxes, allowing the government to  increase spending on public services. 


Non-Recourse Financing  


When a company defaults on a loan, recourse financing gives lenders full  claim to shareholders’ assets or cash flow. In contrast, project  financing designates the project company as a limited-liability SPV. The  lenders’ recourse is thus limited primarily or entirely to the  project’s assets, including completion and performance guarantees and  bonds, in case the project company defaults. 


A key issue in non-recourse financing is whether circumstances may arise  in which the lenders have recourse to some or all of the shareholders’  assets. A deliberate breach on the part of the shareholders may give the  lender recourse to assets. 


Applicable law may restrict the extent to which shareholder liability  may be limited. For example, liability for personal injury or death is  typically not subject to elimination. Non-recourse debt is characterized  by high capital expenditures (CapEx),  long loan periods, and uncertain revenue streams. Underwriting these  loans requires financial modeling skills and sound knowledge of the  underlying technical domain. 


To preempt deficiency balances, loan-to-value (LTV) ratios are usually limited to 60% in non-recourse loans.  Lenders impose higher credit standards on borrowers to minimize the  chance of default. Non-recourse loans, on account of their greater risk,  carry higher interest rates than recourse loans. 


Recourse vs. Non-Recourse Loans  


If two people are looking to purchase large assets, such as a home, and  one receives a recourse loan and the other a non-recourse loan, the  actions the financial institution can take against each borrower are  different. 


In both cases, the homes may be used as collateral, meaning they can be  seized should either borrower default. To recoup costs when the  borrowers default, the financial institutions can attempt to sell the  homes and use the sale price to pay down the associated debt. If the  properties sell for less than the amount owed, the financial institution  can pursue only the debtor with the recourse loan. The debtor with the  non-recourse loan cannot be pursued for any additional payment beyond  the seizure of the asset. 

Project Finance Empirical

risk assessment- monitor- measure- map- modulate- mitigate- manage

Qualitative Risk Identification, Analysis & Mitigation


  • Risk and Reward Relationships of the Players
  • Sponsor Risk
  • Country and Political Risk
  • Risks of the Project Itself


Qualitative Risk Identification, Analysis & Mitigation


  • Risks of the Project Itself


Quantitative Risk Analysis and Debt Sizing/Structuring


  • The Borrower and Sponsor Objectives
  • Use of Different Techniques by Borrower to Assess Project Attractiveness
  • The Banker's Objectives
  • Debt Sizing & Sculpting


Documenting the Deal


  • The Documentation Process
  • A Recap on Syndicated Debt Terminology with Special Reference to Project Finance
  • The Key "Command & Control" Mechanisms in Project Finance Agreements
  • Borrower and Sponsor Needs and "Hot Buttons"


Time-Line & Security-Taking


  • Steps in the Project Finance Process
  • Lender Security 
  • Relative Value of Different Security Types
  • Security in Challenging Locations
  • Key Security Instruments

INVESTOR APPOINTS APKA ON THE BOARD OF pROJECT COMPANY

AS FUND MANAGER AND INVESTOR REPRESENTATIVE

                                                        APKA FUND MANAGEMENT MANDATE

Global Best Practice based Standard Operating Procedure is structured to Map, Measure, Monitor, Manage, Mitigate and Moderate the project management process successfully.

The Principal Funder appoints APKA as the Fund Manager with the following Key  

Performance Indicators KPI based Key Result Area KRA enumeration:

  1. For effective Centralized Coordination The Fund Manger sets up an integrated Communication Command and Control Computerized Curation Centre
  2. The Project Management Office PMO is automated with Business Intelligence to share mission critical inputs to all the stakeholder
  3. PMO is staffed with the Single Point of Contact of all the key Stakeholders
  4. The Investor empowers the PMO to administer both the capital deployment and retirement of the investment
  5. The tenor of the PMO is until the debt has been retired in its entirety
  6. The PMO will be located on the nearest possible vicinity of the project or remotely if such facility is unfeasible
  7. The PMO QC Quality Control has the following roles and responsibilities
  8. Operational oversight of all project receivable and payables
  9. Functional oversight of Enterprise Vendor Management
  10. Fiduciary capability to ensure third party monthly internal Tax Audit conducted by KPMG (designee B.S.R Affiliates if project in India)
  11. Initiate third party external quarterly Trade Exposure Risk Audit conducted by Moody's (designee ICRA if project in India)
  12. Conduct third party quarterly Audit by appointing credible AAA rated regulatorily certified valuators as Agency for Special Monitoring ASM
  13. Ergonomically Monitor and Audit, deployment stages vis-a-vis project Performance, quarterly
  14. Quarterly appraisal of the Principal and Interest component of the retirement schedule
  15. Commence quarterly Project Investment Health Audit and ensure Regulatory Compliance for the lifetime of the Investor engagement.

Dividends of Project Finance

Featurewise comparision between Corporate & Project Finance

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