Project Finance

Lecture 1
Mar 29, 2021
SP Jain Global School of Management
General Guidelines
• Introduction
• Teaching Approach
• Homework and self-study
• Prerequisites
• Class participation
• Lessons learnt
• Case Analysis
• Expectations
• Questions
Definition of Project Finance
• Loan arrangement on a limited recourse or non-recourse basis in
which the repayment is derived primarily from the project's cash flow
on completion, and where the project's assets, rights, and interests
are held as collateral. (Finnerty)
• Project Finance involves the creation of a legally independent project
company financed with non-recourse debt (and equity from one or
more corporate entities known as sponsoring firms) for the purpose
of financing investment in a single-purpose capital asset, usually with
a limited life (Harvard)
Key Players in a Project Finance Transaction
• Sponsor
• Project Company – Special Purpose Vehicle (SPV)
• Government
• Offtaker
• Suppliers
• Engineering, Procurement and Construction (EPC) contractors
• Operations and Maintenance (O&M) contractors
• Export Credit Agencies (ECAs)
Diagram of Key Players and Agreements

Shareholders’ Loan Lenders

Sponsors Agreement Agreements

Host Project Project Offtake Offtaker

Government Agreement Agreement
Company (SPV)

Construction Supply O&M

Contract Agreements Agreements

EPC O&M
Suppliers
Contractor Contractor
Project FinanceCorporate
v/s Corporate
Finance
Finance
Project Finance
Type of Capital Permanent – indefinite time
horizon
Dividend policy and reinvestment Corporate management makes
independent decisions
Capital Investment Decisions Opaque to creditors
Financial Structures More generic, often replicated
Transaction costs for financing Low, due to standard mechanisms
and competition among providers
Size of Financing Flexible
Basis for credit evaluation Overall financial health of
corporate entity – focus on balance
sheet and cash flow
Cost of capital Relatively lower
Finite time horizon – matches life of
project
Fixed dividend policy
Highly transparent to creditors
Highly specific, often unique
Relatively higher due to complex
documentation and longer
gestation period
Typically large
Technical and economic feasibility –
focus on project assets, cash flows
and contractual arrangements
Relatively higher
What’s in it for the various parties?
• Sponsors
• Limited Recourse ***
• High leverage
• Off balance sheet
• Host Government
• Fiscal optimization through Public Private Partnership (PPP)
• Process efficiency
• Performance Risk
• Lenders
• Risk adjusted returns
• Other project-related services
• Relationship benefits
Requirements for Project Financing
• Technical Feasibility
• Economic viability
• Availability of raw materials and capable management
Appropriateness of Project Financing
• Credit requirements of lenders – expected profitability, other forms of
credit support
• Tax implications
• Impact of covenants contained in the agreements
• Legal or regulatory requirements
• Accounting treatment
Risks and Mitigants in Project Financing
• Open discussion
Risks and Mitigants in Project Financing
• Direct assignment to lenders of the project’s right to receive
payments under various contracts:
• completion agreement, purchase and sale contract, financial support
agreement, first mortgage lien on the project’s assets
• Covenants restricting activities of the project company, such as
limitations on:
• permitted investments, funded indebtedness, dividends to equity investors,
additional liens or other encumbrances, expansion of the project, sales and
leasebacks of project assets
Expectations