PROJECT FINANCE

What is Project Finance?

• A way to finance an activity using debt where the debt is repaid from
the funds generated by the activity. Usually, a project financing structure
involves a number of equity investors, known as sponsors, as well as
a syndicate of banks that provide loans to the operation

For example, project financing may involve issuing a bond to pay for the
construction of a museum and repaying it from ticket sales for that
museum. Project financing is often very complex and is most common in the
telecommunications, utilities, transportation, and mining industries. Very often,
a company conducting project finance will set up a different corporation or
other entity for the project to shield the remainder of the company
from liability if the debt goes into default.

• Project financing refers to a financing in which lenders to a project look

primarily to the cash flow and assets of that project as the source of payment of
their loans.

1
 Why Project Financing?
• Project Owners’ Perspective
– Size and cost of projects
– Risk minimization
– Preservation of borrowing capacity
and credit rating
– May be only way that enough funds
can be raised
2
 The Basic Elements of a Project Financing
Lenders

Loan Debt
funds repayment
Raw Purchase
materials contract(s)

Suppliers Assets comprising the project Purchasers

Supply Output
contract(s)
Equity Returns to Cash deficiency
funds investors agreement and
Equity other forms of
investors credit support

3
Project Financing Steps

1. Commitment from decision-makers

2. Project definition
3. Risk analysis
4. Seeking international interest and support
5. Financial and operational structures
6. Legal environment
7. Independent review of the project
8. Information memorandum
9. Assessing investors/lenders interest
10. Debt and equity proposals
11. Negotiations and contractual agreements
12. Meeting disbursement conditions