Understanding Project finance . Broad classification of sources of Finance

1. Kusum Jain
Infrastructure finance management –2020 for PDPU ME (Infrastructure)
• Module 2:
• Sources of Finance: Long term finance, Ordinary shares, Equity
shares, Preference shares, Debentures, Term loans, Asset based
financing, Securities (14 hours)

2. Kusum Jain
Types of Financing
• Corporate Finance
• Project Financing

3. Kusum Jain
Classification of sources of Finance
• Period
• Long Term
• Medium Term
• Short Term
• Ownership
• Owners-Equity,
Retained earnings
• Borrowed-
Debentures, Public
deposits, loans
• Sources of financing
• Internal-Retained
earnings
• External-
Debentures , Loans
• Security Financing
• Shares
• debentures
• Internal financing-
• Retained earnings
• Depreciations
• Loans Financing-
• Short term
• Long term
• International Financing
• Other sources Long Term

4. Kusum Jain
Classification of sources of Finance-Period-Long /Medium/ Short
LONG TERM FINANCING
SOURCES
• Share capital or Equity of
shares
• Preference Share
• Retained Earnings
• Debentures/Bonds of
different types
• Loans from financial
institutions
• Loans from state financial
Corporations
• Loans from commercial
banks
• Venture capital funding
• Asset securitization
• International financing like
Euro-issues, foreign currency
loans
MEDIUM TERM
• Preference Share
• Debentures/Bonds for
uptill 3 years
• Medium Term Loans
• financial institutions
• state financial
Corporations
• from commercial banks
• Lease financing/ Hire
Purchase financing
• External Commercial
Borrowings
• Euro-issues
• Foreign Currency bonds
SHORT TERM
• Trade credit
• Accrued expenses and
differed income
• Short term loan like
working capital loans
from commercial bank.
• Fixed deposit for a
period of 1 year or less
• Advances from customer
• Various short term
provisions

5. Kusum Jain
Project Finance
• Each and every project is established as separate co
• Major portion of project equity is provided by sponsors
• Leverage is high in Project finance co (Debt/ Equity ratio is higher)
• Comprehensive contractual agreement with suppliers and customers.

6. Kusum Jain
Project finance company
Contractual arrangement
• Customers
• Power purchase agreement
• Maintenance days
• Cost of powers
• Lenders agreement
• Sponsor
• Share Holder agreement
• Features related to share holding agreement
• Suppliers :
• Fuel Supply agreement (Amount, Price
• Operating agreement:
• When operations outsources
• EPC:
• Engineering
• Services:
• Construction
• Equipment Supplier
Project
Company
Government
Contractor
Supplier
Sponsor
Lender
Customer

7. Kusum Jain
Project finance company
Contractual arrangement
• Government(License, Concession):
• Concession agreement for private airport
• How much time it is leased for
• May or may not be permanent
• Environment clearance
• Roads
• Land aquisitions Project
Company
Government
Contractor
Supplier
Sponsor
Lender
Customer

8. Kusum Jain
Project finance company
Contractual arrangement
• Contractor
• Equipment
• Maintenance
• Operating agreement:
• When operations outsources
• EPC:
• Engineering-Designing development
• Procurement: Material, Equipment
• Construction
• Equipment Supplier
• Government(License, Concession):
• Concession for private airport
• How much time it is leased for
• May or may not be permanent
• Environment
• Roads
• Land
Project
Company
Government
Contractor
Supplier
Sponsor
Lender
Customer

9. Kusum Jain
Keys features to project finance
• Defining Project:
• provided for a ring fenced
projects
• Usually raised for a new project
rather an established business.
• Capital structure:
• High ratio of debt to equity:
project finance debt may cover
70-90% of the cost of project.
• Recovery of the principal
• non recourse finance
• Limited recourse finance
• Lenders rely on the …….
What is Ring Fenced Project
• One which is legally &
economically self contained
• Project is through a special
purpose legal entity
(company)
• Only business is the project
non recourse finance – no
Guarantees or commitments for
payment of debt or interest from
the parent company for the
project.
Limited recourse finance –
recourse for a limited
duration/till the project
commences operation for project
finance debt.

10. Kusum Jain
Keys features to project finance
• Lenders rely on the
• analysis of historical financial results.
• Contractual arrangements
• Strength of future cash flow projected to be generated by the
project for interest and debt repayment
• the value of its assets though big might not attract as
• can not liquidate the assets
• Assets are of specific nature

11. Kusum Jain
Target use of Period based Financing in Projects
• Long Term Financing
• For a period 5-
10years
• Targeted for FA
(Permanent or
hard core)
investments
• Plant
• Machinery
• Land
• Building
• Medium Term Financing:
• From 1 to 5 years
• Deferred revenue
expenses
• Publicity or
advertisement
campaigns
• Short term financing:
• Less than a year
• Current Asset
requirement.
• Working capital
requirement

12. Kusum Jain
Multiple sources of finance for a project makeup Capital structure
• Equity: Costly
• Debt : Need commitments in terms of equity
• Foreign Equity or Foreign Currency- Subjected to risk of exchange rates
• Project revenues in Rs
• Foreign Debt returns will be in foreign currency
• Currency fluctuations
• Borrowings can not be from single entity
• Banks have legal restrictions
• How much lend for project