VCE Summer Internship Program 2020

Smart Task Submission Format

Intern’s Details
Name Gaurav Parmar

Email-ID gauravkumarparmar999@gmail.com

Smart Task No. 1

Project Topic Project Finance : Modelling and Analysis

Smart Task (Solution)

Task Q1: What is Finance? How Finance is different from Accounting? What are important basic
points that should be learned to pursue a career in finance?

Task Q1 Solution :

Finance is the art and science of managing money and simply meaning is that finance is the
management of money. Finance is majorly divided into three parts: Personal Finance, Public
Finance, and Corporate Finance.
Accounting and Finance both need the advanced level of education to perform the required task
with quantitative & analytical skills but still, we can differentiate both of them in following points:

 Accounting works on what is happening on the other hand Finance sees what we can do for
a better future.
 Accounting has a set of rules and guidelines and Finance is purely based on the analytical
skills, aptitude, and expertise of the person.
 Accounting is more emphasis on reporting the financial events that happened in the past.
But in Finance is more emphasis on identifying ways to increase funds or money and
prevent any losses.
 Accounting professionals need to concrete attention to details, whereas in Finance
professional needs to be long-term visionary and thinkers.
 The base of study for Accounting we need to subject like accounting theory, accounting
practices, etc., but in Finance, microeconomics, and macroeconomics subjects make the
study base.

Those who want to make a career in finance first have an interest in finance that is very important
and they have to get the right degree like an MBA degree with Finance specialization. Besides all
these things some important skills are required for making a career in finance, it includes:
 Interpersonal Skills :
 Basic computer skills (MS office):
 Problem Solving Skills:
 Analytical Skills:

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 Leadership skills:

500 Words (Max.)

Task Q2: What is project finance? How is project finance different from corporate finance? Why
can't we put project finance under corporate finance?

Task Q2 Solution :

Project finance is the long-term financing of infrastructure and industrial projects based upon the
projected cash flows of the project. Project finance is the structured financing of a specific
economic entity – a Special Purpose Vehicle (SPV) – created by the sponsors using equity or debt.

Project Finance is different from corporate finance in many ways, some are mention below table:

Topic Project Finance Corporate Finance

Financing Project finance is based on the In corporate finance, lenders can generally
projects ability to repay the debt lay claim to the assets of the entire
through the cash flows generated of company.
that project alone

Guarantees In Project Finance Project assets are In corporate finance, all assets of the
guarantees for financing company are guarantees for financing

In corporate finance, the risk of the

Risk In Project Finance the risk is much investor is much higher than normal.
lower

In Corporate Finance cost of capital is

Cost of In Project Finance cost of capital is relatively lower than Project finance
Capital relatively higher

Suitable
The project Finance model is more Corporate Finance is a more suitable
suitable in the case of high-risk financing model for MSMEs.
project

Period Project Finance has a Finite period Corporate finance for an indefinite period
as such the debt must be repaid by and losses can be rolled over.
or before the end of the Project,

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Smart Task Submission Format

Treatment in Off-Balance sheet On Balance sheet

Accounting

We cannot put project finance in corporate finance because corporate finance and project finance
are completely different concepts that we can differentiate in the above table and they are being
utilized by the companies at different points of time in their growth chart. The level of focus on cash
flows, and risk mitigation forces project finance models to be highly structured.

500 Words (Max.)

Task Q3: Define 20 terminologies related to project finance.

Task Q3 Solution :

1. Amortization:

Amortization is the reduction of the capital balance or up-front (capitalized) expenses over
time to reflect life-cycle depreciation and obsolescence, often an equal amount per annum.

2. Annuity:

Repayment of debt where the sum of principal and interest is equal for each period, also a
term used in India for availability payments.

3. Bilateral Agencies:

An agency of one country, either public or private, which funds development in other
countries.

4. Break Clause:

A clause giving a party the right to terminate the contract at a particular point is often called
the "breakpoint".

5. Bullet:

A one-time repayment, often after little to no amortization of the loan balance. Also referred
to as a balloon payment.

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6. Buy-back:

A promise to repurchase unsold production. Alternatively, a promise to repay a financial

obligation.

7. Capital Costs:

Costs of financing construction and equipment. Capital costs are usually fixed one-off
expenses.

8. Capital Expenditure:

Long-term expenditure on fixed assets such as land, buildings, plant, and equipment.

9. Completion Risk:

The risk that a project will not be able to pass its completion test within the time for
completion

10. Concession Agreement:

These are project finance documents that are created by and between the project company
and the public entity. Concession Agreements concede the use of a government asset, such
as a plot of land, road, or bridge to the project company for a specified period according to
specified terms.

11. Defects Liability Period:

The period during which the construction contractor is liable for defects after completion.

12. Drawdown:

The obtaining by the borrower of some of the funds available under a credit facility.

13. Facility Fee:

An annual percentage fee is payable to a bank providing a credit facility on the full amount of
the facility, whether or not utilized.

14. Internal Rate of Return or IRR:

The discount rate equates the present value of a future stream of payments to the initial
investment.

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15. Non-recourse:

Non-recourse financing means the borrowers and shareholders of the borrower have no
personal liability to the project lender in the event of monetary default.

16. NPV:

Net Present Value, the discounted value of an investment’s cash inflows minus the
discounted value of its cash outflows. To be adequately profitable, an investment should
have a net present value greater than zero.

17. Public-Private Partnership Framework:

The combination of legal, regulatory, institutional, and financial framework that together
facilitates the implementation of PPP, generally on a programmatic rather than ad hoc basis.

18. Special Purpose Vehicle (SPV):

An entity established for a particular purpose, such as obtaining off-balance-sheet financing,

gaining tax advantages, or isolating the sponsors' other assets from the project's creditors.

19. Sweep:

A covenant that requires all or a specified fraction of available cash flow to be used for debt
service, including prepayments of principal.

20. Risk Management:

Risk Management is the process of evaluating and managing current and future financial risk
to decrease a company’s exposure.

500 Words (Max.)

Task Q4: What is non-recourse debt/loan? What is mezzanine finance explained with an example.

Task Q4 Solution :

Non-recourse debt is a type of loan secured by collateral, which is usually property.

For example, if a borrower defaults on a non-recourse home loan, the bank can only seize the
home. The lender generally cannot take further legal action to collect the money owed on the debt,
even if the collateral does not cover the full value of the defaulted amount. Loan-to-value ratios are
limited to 50% or 60% in non-recourse loans

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Non-recourse debt is characterized by:

 High capital expenditures

 Long loan periods
 Uncertain revenue streams

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.

Mezzanine financing is financing that includes both features of debt and equity financing that gives
the lender the right to convert the loan to an equity interest in the company in case of default.

Mezzanine loans are most commonly utilized in the expansion of companies rather than as start-up
or early-phase financing.

Characteristics:

 It is for companies who have moved beyond start-ups

 Flexible form of financing
 Highly risky
 Mezzanine Funds are unsecure

 For Example:

Mezzanine Funds can be used for buying a company or for expanding one's own business
without going for IPO. Let's say that company x is a maker of computer devices. They want
to expand their business and they decide to go for mezzanine financing.

They go to the mezzanine financier and ask for mezzanine loans. The lenders mention that
they need warrants or options for mezzanine loans. Since the loans are unsecured, the
company agreed to terms set by mezzanine lenders. So, company x takes $100000 by
showing that it has a cash flow of $70000 every year. He takes the loans and unfortunate
defaults at the time of payment since company x couldn't generate enough cash flow, The
lenders take a portion of company X and sell off to get back their money

As a result, the Mezzanine Fund isn’t something everyone would go for. The risk is much higher
and the expectation of benefits is also quite high .

500 Words (Max.)

Task Q5: Explain in detail with reasons of what the sectors are or which type of projects are suitable

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for project finance.

Task Q5 Solution :

Project Finance is generally used in

 Oil extraction,

 Power & Energy

 Infrastructure sectors

The above three-sector are most appropriate for project financing and there is the various reason
for it but the main reason is a low technological risk, a reasonably predictable market, and the
possibility of selling to a single buyer or a few large buyers based on multi-year contracts (e.g. take-
or-pay contracts).

The types of projects that suitable for project finance are:

Water

 Water treatment
 Wastewater

Transport

 Roads
 Bridges
 Rail
 Airport
 Ports

Healthcare and Education

 New facilities
 Refurbishment
 Facilities management

Other Sectors:

 Sports Infrastructure
 Properties and Real Estate

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500 Words (Max.)

Please add /delete blocks for if needed.

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