VARDHAN CONSULTING ENGINEERS

PROJECT FINANCE MODELLING AND ANALYSIS

SMART TASK SUBMISSION-1

Submitted by: BHUMIKA ADLAK

Submitted to: MR. ASHISH S KUMAR

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

WHAT IS FINANCE:

Finance is a term for matters regarding the management, creation, and study of
money and investments. It involves the use of credit and debt, securities, and
investment to finance current projects using future income flows. Because of
this temporal aspect, finance is closely linked to the time value of
money, interest rates, and other related topics. Finance is a term broadly
describing the study and system of money, investments, and other financial
instruments.

Businesses obtain financing through a variety of means, ranging from equity

investments to credit arrangements. A firm might take out a loan from a bank
or arrange for a line of credit. Acquiring and managing debt properly can help a
company expand and become more profitable.

Start-ups may receive capital from angel investors or venture capitalists in

exchange for a percentage of ownership. If a company thrives and goes public,
it will issue shares on a stock exchange.

Finance can be divided broadly into three distinct categories: public finance,
corporate finance, and personal finance. The history of finance and financial
activities dates back to the dawn of civilization. Banks and interest-bearing
loans existed as early as 3000 BC. Coins were being circulated as early as 1000
BC. While it has roots in scientific fields, such as statistics, economics, and
mathematics, finance also includes non-scientific elements that liken it to an
art.
How is Finance different from Accounting?

Finance and accounting are terms often used interchangeably. While both are
related to the administration and management of an organization’s assets, each
contains major differences in scope and focus. When it comes to evaluating and
strategizing the financial health of your company or department, it’s important
to have a working knowledge of both disciplines.

To understand the difference between finance and accounting, you need to

know what each term means.

The key difference between Finance and Accounting is that finance is the

management of the money and the investment of different individuals,
organizations, and other entities, whereas, Accounting is the process of
recording, maintaining as well as reporting the financial affairs of the company
which shows the clear financial position of the company.

WHAT IS FINANCE?

Finance refers to the ways in which a person or organization generates and uses

capital—in other words, how a given party manages their money. This often
encompasses activities such as investing, borrowing, lending, budgeting, and
forecasting.

The field of finance can be broken down to hone in on the specific types of
parties involved, including personal finance, corporate finance, and public
finance. While these categories typically include a similar set of activities, each
type of finance has nuances that reflect the different regulations, considerations,
and concerns of each population.

WHAT IS ACCOUNTING?
Accounting, on the other hand, refers to the process of reporting and
communicating financial information about an individual, business, or
organization. Rather than making strategic financial decisions, accounting
captures an accurate snapshot of a party’s financial position at a specific point
in time—a practice that results in the information that finance activities are
generally based upon.

The typical activities involved in accounting include recording transactions,

collecting financial information, compiling reports, and analyzing and
summarizing performance. The results often include thorough financial
statements—including income statements, balance sheets, and cash flow
statements—that are used to understand an organization’s position at a given
time.

THE DIFFERENCES BETWEEN FINANCE AND ACCOUNTING

1. The Scope and Focus

Finance and accounting operate on different levels of the asset management

spectrum. Accounting provides a snapshot of an organization’s financial
situation using past and present transactional data, while finance is inherently
forward-looking; all value comes from the future.

Accounting
In accounting, insight into a firm’s financial situation is gained through the
“accounting equation,” which is: Assets = Liabilities + Owners' Equity. This
formula looks at what a company owns (its assets), what it owes (its liabilities),
and the residual that belongs to shareholders (owner’s equity). And it must
balance out—the assets on the left should equal the claims against those assets
on the other side. It’s a fundamental means for determining whether a
company’s financial records accurately reflect the transactions carried out over
a period of time.

Finance
When assessing performance through the lens of finance, cash is king. Unlike
accounting’s reliance on transactional data, finance looks at how effectively an
organization generates and uses cash through the use of several measurements.
Free cash flows is arguably the most important one, which examines how much
money a company has to distribute to investors, or reinvest, after all expenses
have been covered. It’s a strong indicator of profitability, and can be used to
make present-day investment decisions based on an expectation of future
payoff.

2. Measuring Financial Performance

This difference in scope underscores a contrast between the underlying

principles of accounting and finance.

Accounting
The accrual method of accounting, which is followed by most organizations,
records transactions as they are agreed upon, as opposed to when they are
completed. It allows for transactions to be made with credit or deferred
payments, and operates under the idea that revenues and costs will smooth out
over time to more accurately depict economic reality. This makes it possible to
compare year-on-year growth of a company’s revenues, costs, and profits
without factoring in one-off events, as well as seasonal and cyclical changes.

Finance
Finance rejects that idea, instead believing that the best way to measure
economic returns from a company is to calculate the cash it’s able to produce
and leverage, which is dependent on when that cash is exchanged—rather than
just agreed upon.

3. Assessing Value

Another point of difference between the disciplines is their approach to value.

Accounting
In accounting, a conservatism principle is often applied, which suggests that
companies should record lower projected values of their assets and higher
estimates of their liabilities. Under this doctrine, if you don't know the value of
something precisely, you count it as zero. Doing so helps businesses avoid
overextending themselves by underestimating the value of assets and
overestimating the liabilities that they owe.

Finance
This is handled much differently in finance, which employs an analytical
process, known as valuation, to determine the worth of a company, project, or
asset. The gold standard is discounted cash flow analysis, which is applied to a
series of cash flows over a period of time. The discount rate (represented as a
percentage) accounts for opportunity cost, inflation, and risk, and brings the
value of a future stream of cash to its present value.

What are important basic points that should be learned to pursue a career
in finance?

1. Analytical Thinking
Analytical thinking is a crucial skill for finance professionals. It refers to
looking at and understanding a situation to interpret it and deriving an
intelligent and thoughtful response. As a finance professional, you’d have to
solve all kinds of problems from technical to interpersonal. When analytical
thinking and problem-solving are your forte, you can devise smart solutions
quickly which would greatly benefit the company, making you its valuable
asset. 
Some of the areas where analytical thinking plays a key role include financial
analysis, risk analysis, risk management, strategic financial planning, and data
analysis. 

2. Accounting Skills 
Accounting skills refer to the techniques and abilities that allow you to track,
record, and manage financial transactions efficiently and effectively. Many
recruiters expect you to have accounting skills as they are crucial for performing
financial analysis, financial reporting, data management, financial modelling,
and plenty of other related tasks.
A fundamental understanding of accounting skills can certainly help you in
getting a good job as a finance professional. After learning these financial skills
you can focus on bagging some of the lucrative roles in the industry such as
Chartered Accountant, Certified Public Accountant, etc. 
3. Business Intelligence 
Finance professionals play a vital role in helping businesses make smart
decisions. To make smart and better-informed decisions, they must know how
to predict future inventory, sales, and related information. This is why
companies prefer professionals who are proficient in leveraging enterprise
resource planning software (ERP). ERP tools like Oracle or SAP are excellent
for managing inventory, planning future purchases, allocating labour hours, etc. 
Also, you must know how to use business analytics software like Tableau.
Knowledge of data visualization tools allows you to convey data-based insights
much effectively to your colleagues, non-technical staff, and senior
management. 

4. Financial Modelling
Financial modelling is the process of representing a real financial situation
through abstract methods. In financial modelling, you design a mathematical
model that represents an assets or portfolios financial performance in a specific
period. 
Financial models help you estimate the valuation of a business or compare
multiple businesses. You might use them for strategic planning such as for
calculating the cost of a new project, deciding on a budget, or testing a
particular scenario. If you’re applying for senior-level roles, companies almost
always will expect you to be proficient in financial modelling.

5. Financial Reporting
Financial reporting is the process of disclosing financial results and pertaining
information to the stakeholders and upper management. Like the accounting
skills we discussed previously, financial reporting is another necessary skill if
you want to get ahead in the finance industry.
In financial reporting, you’d be focusing on creating financial statements,
balance sheets, and income sheets, through which you can show the financial
position of your company to the concerning party. 

6. Cash Flow Management

According to a study, 82% of businesses fail because of poor cash flow
management. Cash flow management is the process of monitoring, and
optimizing the cash receipts a business gets after deducting the cash expenses.
Businesses use cash flow management to manage their finances and focus on
growth as it tracks the ins and outs of a business’s funds. With proper cash flow
management, a business can avoid financial loss and make profitable and
sustainable strategies. 
Thus, cash flow management is a non-negotiable skill for any finance aspirant
or professional. 
7. Financial Management
Financial management refers to organizing, planning, directing, and controlling
financial activities to procure and utilize an organization’s funds. It focuses on
applying general management concepts to a company’s financial resources. 
If you want to get ahead in the finance sector, then you should have this skill.
Financial management is crucial for multiple roles such as investment banker,
portfolio manager, financial advisor, etc. This skill helps you in making better
financial and investment decisions. 

8. Data Management 
Data management is the process of gathering, storing, managing, and
maintaining an organization’s data. Proper data management is necessary to
help the business in performing data analysis and use the data to guide its
decisions.
While as a finance professional you might not have to work extensively on data
management solutions, having this skill will make your job a whole lot easier.
You wouldn’t face problems in using the data or accessing the same for
performing financial analysis or predictive analysis. 
Financial data management allows a company to consolidate its relevant data to
comply with laws and regulations. This is another reason why it’s a sought-after
skill.
Q2. What is project finance? How is project finance different from
corporate finance? Why can’t we put project finance under corporate
finance? Define 20 terminologies related to 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).

Project Financing is a long-term, zero or limited recourse financing solution that

is available to a borrower against the rights, assets, and interests related to the
concerned project.

In other words, “Project finance involves a corporate sponsor investing in and

owing a single purpose, industrial asset through a legally independent entity
financed with non-recourse debt”.
Project finance repayment is not based on sponsoring company’s assets or
balance sheet, but on the basis of revenues that the project will generate once it
is completed.
Corporate finance cannot demonstrate that revenue stream from
completed project will be sufficient to repay the loan that’s why it can’t put
Project finance under corporate finance.

Since lenders believe that their loan principal will be repaid solely from the
cashflows generated by the project, as opposed to the values of the assets, their
focus center on mitigating all risks around those cashflows.

This requires a well developed risk sharing mechanism to get creditors

(especially lenders) on board. Specifically, this takes the form of:
1. A lot of scrutiny to quantify and allocate risk (e.g. what happens if
construction takes longer than planned? Who will buy the product?)
2. The allows more confidence and a high level of debt (e.g. 70 – 90% of
the project cost)
3. Leads to high transaction costs and a lengthy transaction process
The high costs and due diligence makes project finance well suited to large
projects that throw off a reasonably predictable cashflow, but not particularly
well-suited for small projects. Larger projects typically means longer
construction times, and longer operations times to generate a return, which
brings us back full circle to the definition above: Project finance is the financing
of large long term infrastructure projects.

How is corporate Finance different from Project Finance?

Corporate financing refers to the financial management of an overall company,

like deciding the company’s financial model, then raising the finance and
optimal utilization of funds, and enhancing the working of the company. In
contrast, project financing refers to taking financial decisions like sources of
funds, contracts with vendors, and negotiation.
Project finance is the financing of large, long term infrastructure projects. But
theoretically, companies can still “corporate finance” an infrastructure project. 

#1: Project Finance is Non-Recourse Debt

In corporate finance, lenders can generally lay claim to the assets of the entire
company.  For example, when Hertz announced their bankruptcy in 2020, their
lenders are generally entitled to collect on their debts from all the assets held by
Hertz. By contrast, in project finance, the project is “ring-fenced” from the
company (sponsoring entity) that is putting the transaction together via a special
purpose vehicle (SPV) and lenders claims are solely limited to the cash flows
the SPV generates.

That difference changes everything.

That’s because in corporate finance, debt capacity and borrowing costs are

determined based on the assets and risk (or more specifically, enterprise value)
of the entire firm.
By contrast, the amount of debt that can be raised in project finance is based on
the projects ability to repay debt through the cashflows generated of that
project alone. This is the key point around which the structure of project
finance hangs off.

Project Finance is non-recourse debt, meaning the amount and risk of debt
financing is determined solely by the cash flows the project can generate.

#2 Project Finance has no Terminal Value

The second distinction is that there is very often no “terminal value” in project
finance – no sale at the end of the project lifespan which results in an influx in
cash to pay creditors (e.g. lenders). This is partly due to the long term nature of
the assets, and the size of the assets – the market just isn’t that liquid for an
operator of a $1B toll road.
Consider a toll-road concession, where the government grants the rights for 30
years to a private entity for operating the toll road. At the concession end, the
government takes over the toll road.  There are no further cashflows to the
private entity beyond that. Therefore, it’s critical that the cashflows during that
30 year concession can repay the loan principal and interest, AND adequately
compensate the entity.

Alternatively, consider a wind farm which a private entity develops and

operates. It may be that the technology is rated for a 25-30 year lifespan. Or the
lease of the land expires, and the entity needs to decommission the wind farm.
There are really no assets to speak of at the end of the project life. Typically any
scrap value is offset by the cost of removal and rehabilitation of the land.

Why can’t we put project finance under corporate finance?

Simple answer: Corporate Finance is financing that relies on the balance sheet
of the borrower. It would typically be used by a company that wishes to procure
financing for something (including a project such as a new factory) and is
prepared to provide its full faith and security to the lender. Typically the
company will provide security and collateral to the lenders such as a guarantee
from its parent, or debtors and stock and property.

Project Finance on the other hand is finance that relies on the credit of the
project being financed. So for example say the US government wants a new toll
road to be built, and three companies come together to form a consortium to
build and operate the new road, and none of them wants the road on its own
balance sheet. The bank/s financing the new toll road would consider the
possible number of vehicles using the road, the strength of the operator of the
road and all attendant risks, which as you can see is much more complicated
than simple corporate finance. Project Finance involves much more extensive
due diligence than Corporate Finance.

Project Finance is known as non-recourse financing because you have no

recourse to the sponsors of the project, other than what they contractually agree
to.

Define 20 terminologies related to project finance.

Angel Capital

Angel capital is capital invested in a start-up venture or small business

expansion by an angel investor. Angel investors are typically individuals,
partnerships or investment groups who consciously seek higher rates of return
than is available in more traditional investments. An angel investor typically
seeks returns on investment of 25 percent or more per year.

Angel capital is an equity investment where the angel investor provides

funding in exchange for taking an equity position in the company. Equity
financing is normally used by non-established businesses that do not have
sufficient cash flow or collateral with which to secure business loans from
financial institutions.

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.

Base Rate

The Base Rate is the rate of interest used by lenders as a baseline index which
is adjusted either upward or downward pursuant to the terms of the loan. The
two most widely used Base Rates in the world are the Wall Street Journal
Prime Rate of Interest which is published every day in the Wall Street Journal
and LIBOR which is the London Interbank Offer Rate. With either of these
interest rates as an index, lenders add additional basis points as an adjustment
to either increase their margin or simply to compensate for perceived risk.

LIBOR is more stable than WSJ Prime and is preferred by most sophisticated
lenders. The US Discount Rate, which is the interest rate that US banks charge
each other for overnight borrowing, is occasionally used as an index rate but is
far less common than the other two. In the vernacular, common interest rate
terms look like LIBOR + 275 BP, which is LIBOR plus 2.75%, or Prime +1
which is WSJ Prime Rate plus 1%.

Bond
The paper evidence of a legal promise by the issuer to pay the investor (owner
or holder of the bond) on the declared terms. Bonds are usually negotiable and
customarily long-term, generally between 5 to 25 years. Short-term bonds are
usually referred to as notes. See also: Bid bond; Maintenance or retention
bond; Performance bond; Straight debt.

Buy-back

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

a financial obligation.

Buyer Credit

Financing provided to a buyer to pay for the supply of goods or services,

usually by an exporting country or the supplier company.

Call Option

A contract sold for a price that gives the holder the right to buy from the writer
of the option, over a specified period, a specified property or amount of
securities at a specified price. Also known as a “call”. For example, in a bond
or loan, the call option may give the borrower a refinancing option if interest
rates fall below the call option interest rate. The borrower will pay a higher
coupon for this right.

Capital Costs

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

Cross-collateral

A pool of collateral of two or more project sponsors, from which the sponsors
agree to allow recourse to each other’s collateral.

Devaluation
A formal government action which has the effect of decreasing the value of its
own national currency by reducing the equivalent value in gold, special
drawing rights, US dollars or other currencies. However, devaluation is only
possible where fixed exchange rates exist.

Equity Kicker

A share of ownership interest in a company, project or property, or a potential

ownership interest in a company, project or property, in consideration for
making a loan. The kicker may take the form of stock, stock warrants,
purchase options, a percentage of profits or a percentage of ultimate
ownership.

Floating Charge

A form of security taken by a creditor over the whole or substantially the

whole of a company’s assets. The company can continue to use the assets in its
business until an event of default occurs and the charge crystallises. The
holder of the floating charge can then generally appoint an administrative
receiver. See also featherweight floating charge; fixed charge.

Grace Period

The borrower does not have to pay interest or possibly any debt service, during
the grace period, that amount being capitalised. This allows for periods when
revenues are insufficient, e.g. during construction. See also capitalised interest.

Hedge

A method whereby currency (the risk of possible loss due to currency

fluctuations), interest rate, commodity, or other exposure is covered or offset
for a fixed period of time. This is accomplished by taking a position in futures
equal and opposite to an existing or anticipated position, or by shorting a
security similar to one in which a long position has been established. This
open position can be hedged by buying the raw material required on a futures
contract; if it has to be paid for in a foreign currency the manufacturer’s
currency needs can be hedged by buying that foreign currency forward or on
an option. See also swap.
IBRD

(International Bank for Reconstruction and Development) A multilateral

agency focused on middle income countries based in Washington D.C, part of
the World Bank group. Also known as the World Bank.

Insolvency

Insolvency occurs when a company is unable to meet debt obligations.

Institutional Investors

Investors such as banks, insurance companies, trusts, pension funds and

foundations, and educational, charitable and religious institutions.

Internal Rate of Return or IRR

The discount rate that equates the present value of a future stream of payments
to the initial investment. See also financial internal rate of return, but see
economic internal rate of return.

joint Venture

Often used to describe any jointly owned corporation or partnership which

owns, operates or constructs a facility, project or enterprise. More specifically,
an arrangement between two or more parties for the joint management or
operation of a facility, project enterprise or company under an operating
agreement which is not a partnership.

Liquidity

The ability to service debt and redeem or reschedule liabilities when they
mature, and the ability to exchange other assets for cash.

Net Present Value

(NPV) 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.

Non-recourse

The most visible characteristic of project finance is that the financing is non-
recourse as to the borrower, including individual shareholders, individual
partners, and project sponsors. 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. Liability likely still exists in the event
of non-monetary default.

Project companies are generally limited liability special purpose entities, so

any recourse the lender may have will be limited primarily or entirely to the
project assets (including completion and performance guarantees and bonds) if
the project company defaults on the debt.

Novation

The transfer of rights and obligations from one entity to another, e.g. following
the substitution of a new debtor for an old debtor or one bank for another
under a loan facility by way of transfer certificate. Under a novation the
transferor is released from all obligations to the creditor. Also known as
assignment.

Solvency

The state of being able to pay debts as they become due.

Spot Market

The market for buying and selling a specific commodity, foreign currency, or
asset at the prevailing price for immediate delivery.
Q 3. What is non-recourse debt / loan? What is mezzanine finance, explain
with an example.

Non-recourse finance is a type of commercial lending that entitles the lender to

repayment only from the profits of the project the loan is funding and not from
any other assets of the borrower. Such loans are generally secured by collateral.

A non-recourse loan, more broadly, is any consumer or commercial debt that is

secured only by collateral. In case of default, the lender may not seize any
assets of the borrower beyond the collateral. A mortgage loan is typically a
non-recourse loan.

Non-recourse financing entitles the lender to repayment only from the profits
of the project which the loan is funding.

No other assets of the borrower can be seized to recoup the loan upon default.
Non-recourse financing typically requires substantial collateral and a higher
interest rate and is typically used in land development projects.

Non-recourse financing is a branch of commercial lending that is characterized

by high capital expenditures, distant repayment prospects, and uncertain
returns.

In fact, it is similar in its character and risks to venture capital financing. For
example, say a company wants to build a new factory. The borrower presents a
bank with a detailed plan for the construction, and with a business plan for the
greatly-expanded production that it will enable the company to undertake.
Repayment can be made only when the factory is up and running, and only
with the profits of that production.

The lender is agreeing to terms that do not include access to any of the
borrowers' assets beyond the agreed upon collateral, even if they default on the
loans. Payments will only be made when and if the funded projects generate
revenue. If a project produces no revenue, the lender receives no payment on
the debt. Once the collateral is seized, the bank cannot go after the borrowers in
hopes of recouping any remaining losses.

Non-recourse loans and recourse loans are subject to different tax treatments in
the U.S. Non-recourse loans are considered to be paid in full once the
underlying asset is seized, regardless of the price at which the asset is sold.

In the case of recourse debt, if the financial institution forgives any part of the
debt after the associated asset is seized and sold, the forgiven amount may be
treated as ordinary income that the debtor must report to the Internal Revenue
Service.

What are examples of recourse debt?

Secured debt like auto loans, and credit cards are examples of recourse debt.
This means that when borrowers default, lenders can recover the balance with
collateral.
Non-recourse debt is characterized by high capital expenditures, long loan
periods, and uncertain revenue streams. Underwriting these loans requires
financial modelling skills and sound knowledge of the underlying technical
domain. 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.
With non-recourse debt, the creditor's only protection against borrower default
is the ability to seize the collateral and liquidate it to cover the debt owed.
When taking out loans, there are two types of debts: recourse and non-recourse.
Recourse debt holds the borrower personally liable, and all other debt is
considered non-recourse. It seems simple enough, but the average borrower
might not have heard of the two different types, let alone which type of debt
they may have. 

These types of debts can be applied to:

 Loans
 Mortgages
 Credit Cards
 Any other types of debt
It is important that you understand what kind of debt you have, as that will help
you understand your obligations and what could happen in different situations.
This article discusses both types of debts, subtypes, similarities, differences, and
how each kind of debt works. 

If you are unsure which type of debt is better for your situation, it is important
to consult an experienced finance lawyer. Our legal team here at Newburn Law
can help you understand what works best for you.

What is mezzanine finance?

Mezzanine financing is a kind of financing that has both features of debt and
equity financing that provides lenders the right to convert their loan into equity
in case of a default (only after other senior debts are paid off)

For example, a China-backed buyer of a Hong Kong skyscraper from billionaire

Li Ka-Shing for a record $5.2 billion is seeking to borrow as much as 90 percent
to fund the deal and around 40% of this $5.2 billion in one-year mezzanine
financing at 8% interest rate.
Mezzanine financing is a hybrid of debt and equity financing that gives the
lender the right to convert the debt to an equity interest in the company in case
of default, generally, after venture capital companies and other senior lenders
are paid. In terms of risk, it exists between senior debt and equity.

Mezzanine debt has embedded equity instruments. often known as warrants,

attached which increase the value of the subordinated debt and allow greater
flexibility when dealing with bondholders. Mezzanine financing is frequently
associated with acquisitions and buyouts, for which it may be used to prioritize
new owners ahead of existing owners in case of bankruptcy.

KEY TAKEAWAYS

 Mezzanine financing is a way for companies to raise funds for specific

projects or to aid with an acquisition through a hybrid of debt and equity
financing.
 Mezzanine lending is also used in mezzanine funds which are pooled
investments, similar to mutual funds, that offer mezzanine financial to
highly qualified businesses.
 This type of financing can provide more generous returns to investors
compared to typical corporate debt, often paying between 12% and 20%
a year
 Mezzanine loans are most commonly utilized in the expansion of
established companies rather than as start-up or early-phase financing. 
 Both mezzanine financing and preferred equity are subject to being
called in and replaced by lower interest financing if the market interest
rate drops significantly.
 Mezzanine financing bridges the gap between debt and equity
financing and is one of the highest-risk forms of debt. It is senior to pure
equity but subordinate to pure debt. However, this means that it also
offers some of the highest returns to investors in debt when compared to
other debt types, as it often receives rates between 12% and 20% per
year, and sometimes as high as 30%. Mezzanine financing can be
considered as very expensive debt or cheaper equity, because mezzanine
financing carries a higher interest rate than the senior debt that
companies would otherwise obtain through their banks but is
substantially less expensive than equity in terms of the overall cost of
capital. It is also less diluting of the company's share value. In the end,
mezzanine financing permits a business to more capital and increase its
returns on equity.
  Companies will turn to mezzanine financing in order to fund specific
growth projects or to help with acquisitions having short- to medium-
term time horizons. Often, these loans will be funded by the company's
long-term investors and existing funders of the company's capital. In that
case of preferred equity, there is, in effect, no obligation to repay the
money acquired through equity financing. Since there are no mandatory
payments to be made, the company has more liquid capital available to it
for investing in the business. Even a mezzanine loan requires only
interest payments prior to maturity and thus also leaves more free capital
in the hands of the business owner.

Mezzanine Financing Structure

Mezzanine financing exists in a company's capital structure between its senior

debt and its common stock as either subordinated debt, preferred equity, or
some combination of these two. The most common structure for mezzanine
financing is unsecured subordinated debt.

Sub-debt, as it is also called, is an unsecured bond or loan that ranks below

more senior loans or securities in its ability to claim against the company's
assets or earnings. In the case of a borrower default, sub-debt holders are not
paid out until all senior debt holders are paid in full. Unsecured sub-debt means
that the debt is backed only by the company's promise to pay.

In other words, there is no lien or other credit that supports the debt. Other
mezzanine debt is security by a lien on the underlying property and is therefore
secured. Payments are usually made with monthly payments of debt service
based on a fixed or floating rate and the balance due at the maturity date.

Preferred equity, rather than being a loan that may be unsecured or secured by
a lien, is an equity investment in a property-owning entity. It is generally
subordinate to mortgage loans and any mezzanine loans but is senior to
common equity. It is generally deemed to be a higher risk than mezzanine debt
because of increased risk and the lack of collateral.

Example of Mezzanine Financing

In a mezzanine financing example, Bank XYZ provides Company ABC, a

maker of surgical devices, with $15 million in a mezzanine loan financing. The
funding replaced a higher interest $10 million credit line with more favourable
terms. Company ABC gained more working capital to help bring additional
products to the market and paid off a higher interest debt. Bank XYZ will
collect 10% a year in interest payments and will be able to convert the debt to
an equity stake if the company defaults. Bank XYZ was also able to prohibit
Company ABC's borrowing of additional funds and to impose certain financial
ratio standards upon it.

In a preferred equity example, company 123 issues Series B 10% Preferred

Stock with a par value of $25 and liquidation value of $500. The stock will pay
periodic dividends when funds are available until the defined maturity is
reached. The relatively high liquidation value is a takeover defence making it
unprofitable to acquire the stock for such purposes.
Q.4 Explain in detail with reasons of what the sectors are or which type of
projects are suitable for project finance?

Project Finance – A Primer

Project finance is the financial analysis of the complete life-cycle of a project.

Typically, a cost-benefit analysis is used to determine if the economic benefits
of a project are larger than the economic costs. The analysis is particularly
important for long-term projects of growth CAPEX. The first step of the
analysis is to determine the financial structure, a mixture of debt and equity, that
will be used to finance the project. Then, identify and value the economic
benefits of the project and determine if the benefits outweigh the costs.

A sponsor (the entity requiring finance to fund projects) can choose to finance a
new project using two alternatives:

1. The new initiative is financed on the balance sheet (corporate financing)

2. The new project is incorporated into a newly created economic entity, the
SPV, and financed off-balance sheet (project financing)

One of the best ways to increase your knowledge on a subject is to put it to a

practical test. This is why working on real-world projects is an excellent means
to hone your skills. If you’re a finance student looking for finance projects to
work on, then look no further because we’ve listed 27 finance projects to inspire
you to take a hands-on approach! Check out our free courses to get an edge over
the competition.
We have added remarks on certain projects to explain their premises and
benefits. You can pick a project depending on your interests and expertise.

1. ICICI Prudential Life Insurance – The Importance of a Strong Brand Image

Remarks – Branding can have a huge impact on a company’s success.
Understanding how you create a brand and promote it is vital for the growth and
marketing of a business. This project will help you study the same.

The sub-topics could include-

1. ICICI’s current brand image

2. What makes ICICI different from other brands.
3. How ICICI changed the banking culture for good.
4. Strategies to create a brand image.
 5. Employee and Customer Satisfaction
6. Case Study between the ICICI and its competitor showing the above
parameters.

2. What are Non-Performing Assets and How to Deal With Them

Remarks – Non-performing assets put banks at serious financial risk. It is a loan
or advance for which the interest or principal payment is overdue. And there
aren’t many solutions to this problem. You’ll get to explore all the aspects of
this issue.
This is among the best finance project topics for you if you’re interested in
the banking sector.
The sub-topics could include- 
1. How does NPA impact the lending culture of banks?
2. Impact of NPAs on the banks.
3. Comparative study between banks having less and high NPAs.
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3. Evaluating Portfolio and Making Investment Decisions

Remarks – This project will help you understand what a portfolio is and how
you should work with it. You’ll study the different strategies for growing a
portfolio, making it a great project for those who want to get into portfolio
management. It is a great finance research topic for those who want to get into
portfolio management. 
The sub-topics could include:
1. What is a portfolio?
2. How to approach the study of portfolios?
3. How to assess the difference between a good and bad portfolio?
4. What makes a good portfolio?
5. What makes a bad portfolio?
6. Possible investment options basis the portfolio evaluation.

4. Studying the Home Loans Indian Banks Offer

Remarks – Indian Banking Sector is very unique and dynamic. This project will
help you study its effect on the Indian housing sector through its offered loans
and how these loans differ from other lending instruments.

This project will study the effect of the Indian Banking Sector on the Indian
housing sector. A house is an appreciating asset and it is one of the highest
sectors where lending happens in the country.
The sub-topics could include:
1. What is a home loan?
2. What are other different kinds of loans?
3. How is a home loan different from other types of loans.
4. What are the interest rates for different banks?
5. How to choose the right to procure a loan.

5. Mutual Funds – What are They and Their Future

Remarks- Mutual funds are becoming more and more popular every day and if
you’re interested in them, this is among the best finance projects for
you. Mutual funds are getting attention with each passing day. If they interest
you then this is going to be a relatable finance research topic for you. A mutual
fund refers to an open-end investment fund managed by a dedicated fund
manager.
It pools money from many clients including individuals and companies. This is
one of the best finance project topics.
The sub-topics could include:
1. What are mutual funds?
2. What are different types of mutual funds?
3. Who are the different providers of mutual funds?
4. How to choose among different types of mutual funds?

6. A Study on Mergers and Acquisitions in the Indian Banking Sector

Remarks – Indian banking sector has seen plenty of mergers and acquisitions.
You’ll discover the different M&As that have taken place in this field while
doing this project. This project is suitable for students who want to pursue
a career in banking.
The sub-topics could include:
1. What are mergers and acquisitions
2. Why M&As happen?
3. Case studies showing the impact of mergers and acquisitions in the past
10 years for at least six companies both globally and nationally.
4. How mergers and acquisitions dictate the purchasing style of consumers.