PROJECT FINANCE -

AN OVERVIEW
 Introduction
• What is a project ?

• What is project finance ?

• Why project financing is used ?

• Project finance Vs corporate finance

● Investment proposal

● Definite Time / Cost

● Irreversible

● Future uncertain

● Stream of future returns

● Economically separable

● Type of Projects
What is Project Finance
Raise funds for Special capex

Longer time frame

Future prospects of Profits & Cash accruals

Relies mainly on future cashflow

Security as Project assets

 Contd.....

Higher degree of risks

Many participatns

Different Perceptions
Why project finance is used ?
Need for more private capital
Large magnitude

Highly complex

Loan servicing mainly out of future cash

Insulates sponsors from project risks

Sharing of riks

Constraints to borrow in promoter company

 Contd.....
Need not consolidate debt on to Balance
Sheet

Tax advantages

Key issue -Viability

Project Finance Vs Corporate Finance
Accounting treatment

Security for loans

Debt Servicing / Guarantees

Major Variables Involved

Degree of leverage

Risk allocation

Financial Flexibility
 Contd....
Impact on Sponsor's Credit rating

Resolution of Financial distress

Project Financing Structure
Full recourse finance

Non recourse finance

Limited recourse finance

 Full recourse finance
Project
Lenders

Term Lending
Piercing the
corporate veil
through personal
guarantees PROJECT
COMPANY
Primary asset
(Existing or New with
security
Asset Collaterisation)

Project Sponsors
or Promoters
(liable in personal
capacity)
Non Recourse Finance
No direct recourse to the sponser / investors

Reliance only on project assets and cashflow

Structuring needed

Viablity key issue

Return Risk Profile

 Limited recourse finance
Financing
Consortium
Structured security
Loans / Guarantees/ package
Equity
Limited
recourse to
sponsors
PROJECT COMPANY
(generally till
(A SPV with assets exclusive to the
completion of
project which may not provide
implementation
sufficient cover for the borrowings)

Project Government /
Consortium Statutory
(shares the risk in
the project)
authority
Transfer of project
after concession
period
 Full Vs Limited Recourse
Type of Project

Size of Proposed Investment

Comparision of risks involved

Requirement of Strategic/Financial Partners

Revenue Model
 Contd....

Gestation period

Project's dependence on existing facilities

Proposed financing plan

 Why Create SPV / SPE ?
Distinct corporate legal entity

With single purpose

Multiple contracts

No fall back on resources / assets of

sponsors
 Contd....
Limited recourse cases

Apporporate risk allocation

Assignment of rights
 Bankable Project Structure
Acceptable project Sponsors / promoters

Well structured project consortium

Well conceived business model

Well written project contracts

 Contd...
Suitable risk mitigation

Acceptable financing mix & Promoter's

contribution

Financial vialility based on detailed financial

modelling
Thanks