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Project Finance

34 pages


Long term financing of industrial and infrastructure project isoften referred as project finance. The finances are not basedon the balance sheets of their sponsors. Instead, it is based onthe flaws of cash of that particular project. Various parties areinvolved in project finance. A number of equity investors areinvolved. They are known as sponsors too. A bank or otherlending agencies also needs to get involved in order to lendfinancial support or simply loan for various operations. Often,these kinds of loans are non-recourse loan. Non-recourse loancannot be paid with general assets or trustworthiness of theproject sponsors. These loans are secured and paid with thecash flow of the project only. This method is supported bystandard model of finance. Revenue producing contracts and allproject assets are used to secure the finances. A lien over theassets is provided to project lenders. Lenders are givenprivileges are given to the lenders to take control over theproject if the related company is facing difficulties or notcomplying with various terms of the loan.In order to shield other assets of project sponsors to savethemselves from detrimental effects or project failures specialpurpose entities are created for almost every project. Specialpurpose entity indicates that there are no assets owned by therelated company other than those in the project. Financialsoundness of the project is assured by capital contributioncommitment of the owners. Such commitments also ensure thecommitment of leaders towards the sponsors. Project financemethod is comparatively complex than other alternative financingmethods. This method is widely used in the area of mining,transport and communications projects. Project finance isnowadays highly growing in the field of sports andentertainment also.Identifying risks and allocating them efficiently is importantaspect of project finance. There are various risks involved in aproject such as technical risks, environmental and economicrisks and political risks as well. These risks are even noticeablein developing countries and newly emerging markets. Theserisks are considered unacceptable or un-financeable by most ofthe financial institutions and project sponsors. Various deliverymethods are implemented in project finance in order to avoidor decrease these risks. These methods are nothing by variousimplementation patterns of the project in order to manipulateoutputs. According to methods, if risks are a little bit higher,the financing of that project is distributed between more thansingle parties that can be any number more than one. It willmake it sure that both the risk and profit are distributedamong several parties equally and in less amount.

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