What is Project Finance – Example
Project finance developing country like India, there are so many small and big projects that is being constructed for example, metro railways, sea link, mono rails, construction of new bridges, roads and highways, etc. For all these projects finance to be successful firstly you will need money to finance these projects.
The financing of this long term, projects based upon a non-recourse or limited recourse financial structure, where the debt and equity are paid back from the cash flow generated from the project is known as project finance.
Why so many sponsors prefer project financing?
Corporate financing – In this in order to guarantee the additional credit provided by the lenders. The sponsors use all the assets and cash flows from the existing firm. So if the project fails these assets and cash flows are used to repay the debt of the creditors
Project financing – In this the new project and the existing firm live separate lives so even if the new project fails the creditors cannot claim their debt repayment from the asset and cash flow available in the existing firm. This deal is more costly as compared to the corporate financing.
The features of project finance transactions are:-
- Capital intensive – They tend to be large scale projects requiring debt and equity in a large amount.
- Highly leveraged – These transactions have high debt proportion as compared to equity
- Long term – The tenor for project financings can easily reach 15 to 20 years
- Independent entity with a finite life – They form a new legal entity with the sole purpose of executing the project
- Non-recourse or limited recourse financing – It means a the creditor has no or limited claims on the loan in case of default
- Many participants – There are many national and international participants involved in a project laying different risk
- Allocated risk – There are many risk involved in a project for example Environmental, Country risk, Market risk, Project risk, Product risk, Supply risk, Funding risk, Currency risk, Interest risk
- Costly – Raising capital through project finance is generally more costly than through typical corporate finance avenues.
The Key participant in project finance
Government – They participate indirectly in the project. Their work includes approval of the project, control of the state company that sponsors the project, etc.
Project sponsors or owners.-They are the owners with the equity stake in the project
The sponsors of a project finance deal include:-
- Industrial sponsors – these are the industrialist who see some kind of connection of the project with their core business
- Public sponsors – These include central or local government, municipalities, or municipalized companies
- Contractors / Sponsors –These include individuals who develop, build or run plants.
- Financial investors
Project Company –This entity is created solely for the purpose of execution of the project. They are controlled by the project sponsors. They form the center of the project because of its contractual arrangements with operators, contractors, suppliers and customers.
Contractor – The contractor is responsible for constructing the project to the technical specifications outlined in the contract with the project company.
Operator – They are responsible for the maintaining the quality of the projects assets> the operator can be a multinational, a local company or a joint venture depending on the technology required to run the project.
Supplier – They are the input provider for the project
Customer – They are the party who are willing to purchase the projects output
Commercial banks – They source the fund required for project financing. For arranging these large loans banks often form syndicates to sell down their assets.
Master the process of analyzing the feasibility of a project. Perform financial modeling, due deligence of a project. Practice project finance modeling with live examples.
What Are the Financing Mechanisms Under Project Finance training course?
Project finance can be financed using equity and debt
Equity – Usually equity comprises a smaller share compared to debt. In order to demonstrate project viability in the market and to offset initial costs, host governments and debt lenders require some equity funding.
Debt – There are two main types of debt: Mezzanine and Senior Debt.
- Mezzanine Debt: – The mezzanine debt lenders were providing capital in order for one project sponsoring company to purchase the existing project company. If the project fails, senior lenders who were lending to the SPV rather than to the new sponsor company will be paid off first.
- Senior Debt: A senior debt has seniority in the event of default. There are several types of debt available to sponsoring companies. They are Commercial financing, Subsidized loans, Credit enhancing arrangement, Bond financing
Leasing – This is one of the unique method of financing. In this the SPV rents equipment relying on future revenue stream of the project to pay the lease. In simple words, the SPV does not repay the leased equipment immediately but promises to repay once the project begins to earn revenue
Who can do Project Finance/ Pre-requisites?
Any individual who has knowledge about finance, knows how to prepare project finance modeling, possess good analytical skills can enter into a career of project finance.
Project Finance analyst job profile would require to perform the certain activities
- Develop and deliver presentations to clients
- Developing of project finance model and advising on it
- Analyze the different fund option available and create funding strategies
- Develop and analyses different documentation necessary in a deal
- Negotiating and getting the deal closed
- Valuing the project finance portfolio