Project Finance

1. What is Finance? How Finance is different from Accounting? What are important basic points
that should be learned to pursue a career in finance?

Ans: Finance is the management of large amounts of money, especially by governments or large
companies.

There are some major differences in the ways finance vs accounting professionals work with
financial statements – accountants are primarily responsible for creating them, while finance
professionals are primarily responsible for analyzing them.

Accountants, by nature, are backward-looking because they take historical financial information
to prepare their reports. By the time their reports come out, the figures could be several months
old.

Finance professionals, by contrast, are forward-looking because they have the nearly impossible
task of trying to predict the future.

Important basic points that should be learned to pursue a career in finance: -

1. Basic math’s - to be quick analytically & do fast calculations

2. Concept of Return - understanding that money idle is money wasted, you need to put it in
bank (or invest) and earn returns on it
3. Concept of Risk Vs Return - higher the risk, higher should be the return. If share market gives
you same return as fixed deposits, choose fixed deposit as risk there is less. If risk increases,
return should also increase.

2. What is project finance? How is project finance different from corporate finance? Why can’t we
put project finance under corporate finance?

Ans:- Project Finance on the other hand is finance that relies on the credit of the project being
financed.

Corporate Finance is financing that relies on the balance sheet of the borrower. It would
typically be used by a company that wishes to procure financing for something (including a
project such as a new factory) and is prepared to provide its full faith and security to the lender.
Typically the company will provide security and collateral to the lenders such as a guarantee
from its parent, or debtors and stock and property.

Project Finance is known as non-recourse financing because you have no recourse to the
sponsors of the project, other than what they contractually agree to.

3. Define 20 terminologies related to project finance.

Answer:-
1. Amortization-Amortization is the reduction of the capital balance or up-front (capitalized)
expenses over time to reflect life-cycle depreciation and obsolescence, often an equal
amount per annum. Sometimes describes repayments over time, in a series of instalments.
See also depreciation.
2. Annuity- Repayment of debt where the sum of principal and interest is equal for each
period; also a term used in India for availability payments.
3. Bond- The paper evidence of a legal promise by the issuer to pay the investor on the
declared terms. Bonds are usually negotiable and customarily long-term, e.g. five to 25
years. Short-term bonds are usually referred to as notes. See also bid bond; maintenance or
retention bond; performance bond; straight debt.
4. Buy-back- A promise to repurchase unsold production. Alternatively, a promise to repay a
financial obligation.
5. Capital Costs- Costs of financing construction and equipment. Capital costs are usually fixed,
one-off expenses.
6. Capital Expenditure- Long-term expenditure on fixed assets such as land, buildings, plant
and equipment.
7. Compound Interest- Interest resulting from the periodic addition of simple interest to
principal, the new base thus established being the principal for the computation of interest
for the following period.
8. Cost of Debt- Yield to maturity on debt; frequently after tax, in which event it is one minus
the tax rate times the yield to maturity.
9. Default Risk-The risk that a counterparty to a financial transaction will fail to perform
according to the terms and conditions of the contract (default), either because of
bankruptcy or any other reason, thus causing the asset holder to suffer a financial loss.
10. Fixed Rate- An interest rate that is fixed (calculated as a constant specified percentage) for a
defined period.
11. Fixed Rate Loan-A loan for which the rate paid by the borrower is fixed for the life of the
loan.
12. Floating Charge-A form of security taken by a creditor over the whole or substantially the
whole of a company’s assets. The company can continue to use the assets in its business
until an event of default occurs and the charge crystallises. The holder of the floating charge
can then generally appoint an administrative receiver. See also featherweight floating
charge; fixed charge.
13. Floating Interest Rate- An interest rate that fluctuates during the term of a loan in
accordance with some external index or a set formula, usually as a margin or spread over a
specified rate.
14. Future Value- The value of an initial investment after a specified period at a certain rate of
interest (interest rate).
15. Guarantor- A party which will guarantee repayment or performance of a covenant.
16. Hurdle Rate- Minimum acceptable rate of return on investment.
17. Insolvency- Insolvency occurs when a company is unable to meet debt obligations.
18. Interest Rate- Interest Rate is a fee for borrowing money from a bank or institution. The fee
is usually an annual percentage of the amount borrowed.
 19. Internal Rate of Return or IRR- The discount rate that equates the present value of a future
stream of payments to the initial investment. See also financial internal rate of return, but
see economic internal rate of return.
20. Joint Venture- Often used to describe any jointly owned corporation or partnership which
owns, operates or constructs a facility, project or enterprise. More specifically, an
arrangement between two or more parties for the joint management or operation of a
facility, project enterprise or company under an operating agreement which is not a
partnership.

4. What are non-recourse debt / loan? What is mezzanine finance explain with example.

Answer:-Non-recourse debt is a type of loan secured by collateral, which is usually property. If

the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for
any further compensation, even if the collateral does not cover the full value of the defaulted
amount.
Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to
convert to an equity interest in the company in case of default, generally, after venture capital
companies and other senior lenders are paid.
Bank XYZ provides Company ABC, a maker of surgical devices, with $15 million in mezzanine
financing. The funding replaced a higher interest $10 million credit line with more favorable
terms. Company ABC gained more working capital to help bring additional products to the
market and paid off a higher interest debt. Bank XYZ will collect 10% a year in interest payments
and will be able to convert to an equity stake if the company defaults.

5. Explain in detail with reasons of what the sectors are or which type of projects are suitable fit
for project finance?
Answer:-
Project finance is generally used in oil extraction, power production, and infrastructure sectors.
These are the most appropriate sectors for developing this structured financing technique, as
they have low technological risk, a reasonably predictable market, and the possibility of selling
to a single buyer or a few large buyers based on multi-year contracts.
Project finance is the structured financing of a specific economic entity – a Special Purpose
Vehicle (SPV) – created by the sponsors using equity or debt. The lender considers the cash flow
generated from this entity as the major source of loan reimbursement.
Hence, if the borrower has a debt default, the debt-issuer has the right to seize the assets of the
said SPV. However, they do not have the right to any further assets that are not part of the SPV,
even if the liquidating assets of the SPV are not sufficient to cover the value owed due to
default.
Cash flows generated by the SPV must be sufficient to cover payments for operating costs and to
service the debt in terms of capital repayment and interest. Because the priority use of cash
 flow is to fund operating costs and to service the debt, only residual funds after the latter are
covered can be used to pay dividends to sponsors undertaking the project

6. Are you satisfied with your knowledge of Basics of Project Finance? If yes then explain the gist
of it.
Answer:-
Yes, I am satisfied with the basic knowledge of Finance . Project finance involves a structure
under which groups of investors can easily work together, thus easily enabling the risk of the
investment to be divided up.