Project finance involves structured financing for specific economic entities, focusing on project companies created by sponsors, with cash flows serving as primary loan reimbursement sources. It provides an alternative to corporate financing, allowing for limited recourse to sponsors' assets and better risk allocation, though it may be more costly to organize. The global project finance market has shown a shift from developed to developing markets, with significant growth in telecommunications projects despite an overall decline.

1. Project Finance Session 1: Introduction to Project Finance

2. AgendaWhat is Project Finance?Why use Project Finance? Who uses Project Finance? Separate Incorporation & Contamination Risk The Global Project Finance Market20092

3. What is Project Finance?… the structured financing of a specific economic entity – the SPV, also know as a project company – created by sponsors using equity or mezzanine debt and for which the lender(s) consider the cash flows as being the primary source of loan reimbursement. 20093

4. Financing New ProjectsNormally Two Alternatives:Financed “On” Balance Sheet (Corporate Financing)Sponsors use all the assets and cash flows from existing firm to guarantee the additional creditDrawback: Risk to existing operationsFinanced “Off” Balance Sheet (Project Financing)Project not successful, project creditors have no claim on the firms’ assets and cash flows. Drawback: structuring & organizing is more costly – approx. 5 – 10%20094

5. Characteristics of Project FinanceThe debtor is a project companyLegally independent from SponsorsThe investment is in a Capital AssetLenders have limited recourse to Sponsors assetsRisk (more) Equitably AllocatedCash Flows cover operating costs & debt servicing20095

6. Why Use Project Finance? 20096

7. Who uses Project Finance?Industrial SponsorsUpstream / Downstream e.g. BHP Billiton, Rio Tinto, BPPublic SponsorsSocial Welfare Projects e.g. UK Government (PFI / PPP) etc. Contractors / SuppliersBOT / BOOT e.g. Bechtel (US), Leighton's (AUS)Financial InvestorsDistressed assets, infra. Funds e.g. MIG, Cintra20097

8. Private Public PartnershipsIn general, two forms based on a concession agreement:Private Party constructs works that will be used directly by the public administration i.e. hospitals, schools, prisons. Concession provides for construction and operation of the asset (possibly with support of a public grant) i.e. toll roadsBOT (Build, Operate & Transfer)BOOT (Build, Own, Operate & Transfer)20098

9. The Project Company20099

10. The Project CompanyThe success of the project depends on the network of contracts and the allocation of risk between the different counterpartiesTurnkey Construction ContractO&M AgreementPurchasers & Sales AgreementSupply & Raw Material Supply Agreements200910

11. Risk ManagementProject Finance as a Risk Management TechniqueSystem for distributing risk among involved partiesMinimizes the volatility of cash inflows & outflowsProcess of Risk ManagementRisk Identification Risk Analysis Allocation of Risks (ARTS)Residual Risk Management200911

12. Global Project Finance Market200912

13. Global Project Finance MarketOverall Market Declined 61% (YTD, Qtr 3)Telecommunications Projects Increased 36.5%Sasan Power Ltd. (India) – Top Deal $2.8 BillionDolphin Energy (UAE) – Top EMEA Deal $2.2 Billion200913

14. Global Project Finance Market200914

15. Global Project Finance Market200915

16. Global Project Finance Market200916

17. Global Project Finance Market200917

18. Global Project Finance Market200918

19. EMEA Project Finance Market200919

20. SummaryProject Finance relates to financing of capital assets investmentsmade by specific economic entities or project companies (“Off” Balance Sheet)Project Cash-Flows are the primary source of loan reimbursementProject Finance is a Risk ManagementtoolOver the past 20 years Project Finance has migrated from developed to developing markets200920

21. Case Questions …To be completed and presented in Groups of 3. 200921