Muhammad KAMRAN – FCA.

Objectives
To understand what project financing is
and what steps are involved in securing and
managing it.
Part – 1
Introduction
For whom is it important to understand project financing?
Why is it important to understand project financing?
 What is a project?
 Types of projects.
 What is project financing?
 Key characteristics of project financing.
Advantages of project financing.
 Disadvantages of project financing.
Introduction – For whom is it important to
understand project finance?
 Financial managers
 Sponsors
 Lenders
 Consultants and practitioners
 Project managers
 Builders
 Suppliers
 Engineers.
 Researchers
 Students.
Introduction – Why is it important to
understand project finance?
The people involved in a project are used to find financing deal
for major construction projects such as mining, transportation
and public utility industries, that may result such risks and
compensation for repayment of loan, insurance and assets in
process. That’s why they need to learn about project finance in
order to manage project cash flow for ensuring profits so it can
be distributed among multiple parties, such as investors,
lenders and other parties.
Introduction – What is a Project?
A Project is normally a long-term infrastructure, industrial or
public services scheme, development or undertaking having:

large size.
Intensive capital requirement – Capital Intensive.
finite and long Life.
few diversification opportunities i.e. assets specific.
Stand alone entity.
high operating margins.
Significant free cash flows.

Such projects are usually government regulated and monitored

which are allowed to an entity on B.O.O or B.O.T basis.
Introduction – Types of Project.
 Motorway and expressway.
 Metro, subway and other mass transit systems.
 Dams.
 Railway network and service – both passenger and cargo.
 Power plants and other charged utilities.
 Port and terminals.
 Airports and terminals.
 Mines and natural resource explorations.
 Large new industrial undertakings – [no expansion and
extensions.
 Large residential and commercial buildings.
Introduction – What is Project Financing?
International Project Finance Association (IPFA) defined project
financing as:

“The financing of long-term infrastructure, industrial projects

and public services based upon a non-recourse or limited
recourse financial structure where project debt and equity used
to finance the project are paid back from the cash flows
generated by the project.”

Project finance is especially attractive to the private sector

because they can fund major projects off balance sheet.
Introduction – Key characteristics of Project
Financing.
The key characteristics of project financing are:
Financing of long term infrastructure and/or industrial
projects using debt and equity.
Debt is typically repaid using cash flows generated from the
operations of the project.
Limited recourse to project sponsors.
Debt is typically secured by project’s assets, including revenue
producing contracts.
 First priority on project cash flows is given to the Lender.
 Consent of the Lender is required to disburse any surplus
cash flows to project sponsors
 Higher risk projects may require the surety/guarantees of
the project sponsors.
Introduction - Advantages of Project
Financing.
 Eliminate or reduce the lender’s recourse to the sponsors.
 Permit an off-balance sheet treatment of the debt financing.
 Maximize the leverage of a project.
 Avoid any restrictions or covenants binding the sponsors
under their respective financial obligations.
 Avoid any negative impact of a project on the credit standing
of the sponsors.
 Obtain better financial conditions when the credit risk of the
project is better than the credit standing of the sponsors.
 Allow the lenders to appraise the project on a segregated and
stand-alone basis.
 Obtain a better tax treatment for the benefit of the project,
the sponsors or both.
Introduction – Disadvantages of Project
Financing.
 Often takes longer to structure than equivalent size
corporate finance.
 Higher transaction costs due to creation of an independent
entity. Can be up to 60bp
 Project debt is substantially more expensive (50-400 basis
points) due to its non-recourse nature.
 Extensive contracting restricts managerial decision making.
 Project finance requires greater disclosure of proprietary
information and strategic deals.
Part – 2
Stages in Project Financing.
Project identification
Risk identification & minimizing Pre Financing Stage
Technical and financial feasibility
Equity arrangement
 Negotiation and syndication Financing Stage
 Commitments and documentation
 Disbursement.
 Monitoring and review
 Financial Closure / Project Closure Post Financing
Stage
 Repayments & Subsequent monitoring.
Stages in Project Financing – Project
Identification.
 Identification of the Project
 Government announced
 Self conceived / initiated

 Identification of market
 Product of the project
 Users of the product
 Marketability of the product
 Marketing Plan
Stages in Project Financing – Risk
Identification and Minimizing.
Risk Solution
Completion Risk Contractual guarantees from contractors,
manufacturer, selecting vendors of
Price Risk repute.
hedging
Resource Risk Keeping adequate cushion in assessment.
Operating Risk Making provisions, insurance.
Environmental Risk Insurance
Technology Risk Expert evaluation and retention accounts.
Interest Rate Risk Swaps and Hedging
Insolvency Risk Credit Strength of Sponsor, Competence
of management, good corporate
Stages in Project Financing – Risk
Identification and Minimizing.
Currency Risk Hedging
Political and • Externalizing the project company by forming
Sovereign Risk it abroad or using external law or jurisdiction
• External accounts for proceeds
• Political risk insurance (Expensive)
• Export Credit Guarantees
• Contractual sharing of political risk between
lenders and external project sponsors
• Government or regulatory undertaking to
cover policies on taxes, royalties, prices,
monopolies, etc
• External guarantees or quasi guarantees
Stages in Project Financing – Technical
and Financial Feasibility.
 Technical feasibility
 Location
 Design
 Equipment
 Operations / Processes.

 Financial feasibility
 Business plan / model
 Projected financial statements with assumptions
 Financing structure
 Pay-back, IRR, NPV etc.
Stages in Project Financing – Equity
arrangement.
 Sponsors
 Lead sponsors
 Co – sponsors

 Private equity participation

 Angel investors – Private equity funding
 Financial institutions
 Non-financial institutions.
Stages in Project Financing – Negotiation
and syndication.
 Lenders
 Banks.
 Non- banking financial institutions.
 International lending institutions.

 Syndication
 Lead arranger.
 Co-arrangers.

Negotiation
 Pricing.
 Documentation.
 Disbursement.
Stages in Project Financing –
Documentation.
 Commitment letters / MOUs
 Commitment letters from sponsors and investors
 MOU signing with financiers.

 Documents
 Offer Letters
 Lending agreements
 Security documents
 Disbursement plan

Contracts
Management/shareholder agency relationship
Inter corporate agency relationship
Government/corporate agency relationship
Bondholder stockholder relationship
Stages in Project Financing –
Disbursement.
 Equity Disbursement
 Shares application.
 Shares proceeds.
 Share certificates.

 Loan Disbursement
 Sponsor loans
 Advance payments
 Progress Payment
Stages in Project Financing – Monitoring
and Review
 Why?
 Project is running on schedule
 Project is running within planned costs.
 Project is receiving adequate costs.

 How?
 First hand information.
 Project completion status reports.
 Project schedule chart.
 Project financial status report.
 Project summary report.
 Informal reports.
Stages in Project Financing – Financial
Closure / Project Closure
Financial closure is the process of completing all project-related
financial transactions, finalizing and closing the project financial
accounts, disposing of project assets and releasing the work site.

Financial closure is a prerequisite to project closure and the Post

Implementation Review (PIR). A project cannot be closed until all
financial transactions are complete, otherwise there may not be
funds or authority to pay outstanding invoices and charges.
Financial closure establishes final project costs for comparison
against budgeted costs as part of the PIR. Financial closure also
ensures that there is a proper disposition of all project assets
including the work site.

Project closure and commencement take place after financial

closure.
Stages in Project Financing – Repayment
& Subsequent Monitoring
 Repayments
 Grace period.
 Monthly installment.
 Quarterly installments.
 Dividends

 Monitoring?
 Appointment of directors and managers.
 Management meetings.
 Board meetings.
Part – 3
Conclusion.
 A typical project financing structure.
 Highlights of project financing structure.
Conclusion – A Typical Project Finance
Structure.
Conclusion – Highlights of Project
Financing Structure.
 Independent, single purpose company formed to build and
operate the project.
 Extensive contracting
 As many as 15 parties in up to 1000 contracts.
 Contracts govern inputs, off take, construction and
operation.
 Government contracts/concessions: one off or operate-
transfer.
 Ancillary contracts include financial hedges, insurance for
Force Majeure, etc.
Conclusion – Highlights of Project
Financing Structure.
 Highly concentrated equity and debt ownership
 One to three equity sponsors.
 Syndicate of banks and/or financial institutions provide
credit.
 Governing Board comprised of mainly affiliated directors
from sponsoring firms.
 Extremely high debt levels
 Mean debt of 70% and as high as nearly 100%.
 Balance of capital provided by sponsors in the form of
equity or quasi equity (subordinated debt).
 Debt is non-recourse to the sponsors.
 Debt service depends exclusively on project revenues.
 Has higher spreads than corporate debt.
Thank You.