This document discusses project financing. It provides an overview of the stages of project financing, sources of financing, participants and criteria. It also discusses principal agreements, project risks, and risk identification through due diligence. Project financing refers to financing of long-term infrastructure, industrial projects, and public services based on a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cashflow generated by the project.

2.  Overview
 Stages of Project Financing
 Sources of financing
 Participants and Criteria
 Principal Agreements
 Project risk
 Additional problem areas
 Risk Identification – Due Diligence
 Principal Agreements
 Risk management

3.  “Project is an approval for a capital
investment to develop facilities, and provide
goods and services.”
 - World Bank.
 Project finance is financing of a facility in
which a lender looks principally to the cash
flow generated by the operation of the
project for the source of funds from which its
loan will be repaid.

4.  Creation of a separate project entity
 Very high debt component
 Cash flows are separated
 Debt services depend on project cash
flows
 Appropriate for projects with high capex
and risk
 Insulate company’s balance sheet from
impact of project

5. Merits
 Non Recourse
 Maximize Leverage
 Off-Balance-Sheet
 Maximize Tax Benefit
Demerits
 Extremely Complex
 High Costs
 More Risk assumed by lenders
 Cost of Capital greater than Traditional
Finance

7.  Equity
 Developmental loan
 Subordinated loan
 Senior debt
 Syndicated loan
 World bank group financing source
 Bonds
 Investment funds
 Institutional lenders
 Host government

8.  Sponsor/Equity investor/Developer and
additional equity investors
 Equipment Supplier
 Construction Contractor
 Operations and Maintenance Contractor
 Product off takeover
 Lender
 Equipment, Electricity and Fuel Supplier(Power
sector)

9.  Investment Size
 Technology
 Marketing
 Equipment

10. The key objectives of financial management would
be to:
 • Create wealth for the business
 • Generate cash, and
 • Provide a return on investment keeping in mind
the risks that the business is taking and the
resources invested

11. There are three primary elements to the
process of financial management
1) Financing Planning
2) Financial Control
3) Financial Decision Making

12.  The Payback Period
• Advantages of Payback Period:
• Disadvantages of payback period:
 Net Present Value
• Advantages of the net present value method:
 The Discounted Payback Period

13.  Construction Contract
 Project Description
 Price
 Payment
 Completion Date
 Performance Guarantees

14.  Feedstock Supply Agreements
 Product Off Take Agreements
 Operations and Maintenance Agreement

15.  Loan and Security Agreement
 Disbursement Controls
 Progress Reports
 Covenants Not to Amend
 Completion Covenants
 Dividend Restrictions
 Debt and Guarantee Restrictions
 Financial Covenants
 Subordination
 Security

16.  Project Completion
 Market Risk
 Foreign Exchange Risk
 Macro Economic Convertibility
 Tariff Adjustment for Currency
Depreciation

17.  Full Recourse to Non Recourse
 Experts Reports
 Release of Cash Flow
 Accelerated Debt Service
 Lender Liability
 Removal of Limited Recourse
 Abandonment
 Insurance Requirements
 Intercreditor Issues

18.  Due Diligence is an analysis and appraisal
of an entity in preparation for establishing a
relationship with that entity which involves
business risk.
Objectives:
 Look for overvalued assets/under recorded
liabilities
 Look at the quality of management
 Look at Tax structure and its impact
 Review projected cash flow

19. Financial
Tax
Legal
Ops & IT
HR
Market

20.  Construction Phase
• The Drawdown Phase
• Role of Technical Advisor
• Insurance

21.  Operations Phase
• Credit Agreement Undertakings
• Budgets
• Priority of Accounts