This document provides an overview of project financing. It discusses that large construction projects are usually sponsored by governments for infrastructure like roads, airports, and power plants. Project financing involves non-recourse loans that are backed by the government but have no clear immediate return. Banks facilitate these large loans by forming syndicates to distribute the risk. The loans are repaid over time through potential revenue streams generated by the project.

1. Project
Financing
Lecture by Dr. Dana Stevens
Summary by Prof. Dr. John JA
Burke, and Saida Syzdykova

2. Project Financing
 Large
construction projects usually
sponsored by Governments
 Roads
 Airports
 Telecommunications
 Health Care Facilities
 Power Plants
 Water Systems

3. Particular Features
 Non-recourse loans
 Not collateralised
 No clear and immediate return
 Loan is backed [guaranteed] by
Government
 Political Risk of Non-payment/Default
 Potential Revenues
 Taxes
 Income Streams produced by porject

4. Banks
 Regulated to minimise sovereign risk
 Sums involved in Project Financing are
substantial
 Exceeding 50 million
 Singlebank is prohibited from undertaking
a large exposure in a single investment
 One option for non-recourse loans
 Use off-shore bank
 Less regulated; lower reserve requirement

5. Construction
On Shore
Bank
Parent Sovereign
Debtor Sovereign
Interbank issues debt
Deposit of 1 underwritten
million by OSB
Off-shore
Bank
OSB sells Subsidiary 1% reserve
debt and produces loan of
forms 100,000,000
Consortium

6. Debt issued may exceed
amount of paper loan
 Reason
 Debt may be required to sell at discount
due to sovereign risk
 Debt issued may have to equal value of
110 million or more
 Debt will be sold on Eurobond market
 Structure
 Loan collateralised with debt

7. Two Types of Repayment/Risk
 Interest payments  Principal
 Due semi-annually  Face Value repaid
 Interest Payment Risk at date of Maturity
 Interest rates are  Principal Risk
relevant only  Various options are
because changes
can reduce or
available to
increase value of approach principal
debt leading to risk [Discussed
capital gains/losses Later]

8. World Bank
 World Bank
 International Bank for Reconstruction and
Development
 World Bank does not fund large infrastructure
projects
 Two Roles
 Vet the project and Approve
 Government submits request for project
approval to WB; WB then analyses project as to
value and ability to repay
 Guarantee the interest payments on the project

9. List of WB Approved Projects
 Distributed to major banks in financial
sector
 Banks select from list
 Organise a consortium of banks
 Syndicated Lending
 Participating banks will indicate quality of
investment
 Banks make money principally from
origination fees

10. Assume Example
 100 million loan  Sinking Fund [Segregated]
 Flow of Payments from  Assume 10 million per year in
Project Interest
 Y1
 Y1
 20 million
 30 million
 Y2
 Y2  10
 20  Y3
 Y3  0
 10  Y4
 Y4  30
 40  Y5
 Y5  10
 20  Insufficient to Cover

11. Project Company
 Debt funnelled through Project Company
 Company issues equity guaranteed by
government

12. Bond
 Assume Face Value of 1000
 Assume Coupon Rate of 5%
 Required rate is 20%
 Maturity date is 50 Years
 Solving for Bond Valuation
 PVb = PMT x PVIFA, 10%, 100 + FV x PVIF,10%, 100
 PVb = 275

13. Strip Bonds
Coupon
50
FV of Bond
50
1000
A strip is a bond where the coupons are
cut off. They then constitute an annuity

14. Value of Stripped Bond
 FV/(1+r)m-t
 1000/(1+.05)50-25
 1000/(1.05)25
 PVb = 295

15. Insurance Effects
S = FV = C + S/(1+r)m
 S = Strip = 150
 C = Cost = 100
 R = interest rate = 20%
 M = time to maturity = 25 years
 101
 FV of S = 101
 If r =.05 then 145