SMART TASK 1

OF

PROJECT FINANCE

By

(VARDHAN CONSULTING ENGINEERS)

SUBMITTED BY-

DEVESH BHATT

EMAIL ID- deveshbhatt100@gmail.com

(SCHOOL OF MANAGEMENT STUDIES)

PUNJABI UNIVERSITY, PATIALA

(2019-21)
Q-1- What is finance? How finance is different from accounting? What
are important basic point that should be learned to pursue a career in
finance?

Ans- MEANING OF FINANCE- Finance can be well termed as an art of

managing money and investments for individuals, corporations, and
governments. Generally cash is a life blood of the business. Business
should maintain or utilize it carefully. Here what finance come in limelight. It
is regarded as management of money and money related transactions.
Management of money means the ways in which money is handled, rotated
and manipulated in order to make profits. Every business generally takes
three important decisions

 Investment decision
 Financing decision
 Dividend decision

Finance is defined as the management of money and includes activities

such as investing, borrowing, lending, budgeting, saving, and forecasting.
There are three main types of finance: (1) Personal, (2) Corporate, and (3)
public/government.

 Personal Finance:

Financial planning involves analyzing the current financial position of

individuals to formulate strategies for future needs within financial
constraints. Personal finance is specific to every individual's situation and
activity therefore, financial strategies depend largely on the
person's earnings, living requirements, goals, and desires.

 Corporate Finance:

Corporate finance refers to the financial activities related to running a

corporation, usually with a division or department set up to oversee the
financial activities.
  Public Finance:

Public finance includes tax, spending, budgeting, and debt issuance

policies that affect how a government pays for the services it provides to
the public. The federal government helps prevent market failure by
overseeing the allocation of resources, distribution of income, and
economic stability.

Difference between finance and accounting:

The difference between finance and accounting is that accounting focuses

on the day-to-day flow of money in and out of a company or institution,
whereas finance is a broader term for the management of assets and
liabilities and the planning of future growth.

Accounting is more about accurate reporting of what has already happened

and compliance with laws and standards. Finance is about looking forward
and growing a pot of money or mitigating losses. If you like thinking in
terms of a longer time horizon you may be happier in finance than in
accounting.

Career in finance

To pursue a career in finance one should possess

 Formal qualification - one should have formal degree in finance like

MBA to pursue career in it

 Accounting knowledge- knowledge of accounting is must. One

should be familiar with accounting rules and principles

 Analytics – one should be good in analytics. Data analytics is must

to analyses the important parameters in finance
  Financial reporting – one should be good at financial reporting.
Without having knowledge about financial reporting ,we cannot be
good finance manager

 Tech savvy – finance managers must be equipped with latest

technology. Like one should have command on excel , r language
which is trending and widely used in corporate world

 Communication – one should be good in communication also.

Q-2- What is project finance? How is project finance different from

corporate finance? Why we can’t put project finance under corporate
finance?

ANS- PROJECT FINANCE- Project finance is the funding (financing) of

long-term infrastructure, industrial projects, and public services using a
non-recourse or limited recourse financial structure. The debt and equity
used to finance the project are paid back from the cash flow generated by
the project. A project finance venture embraced is totally a shaky sheet
thing for the parent. Subsequently, all financing this element profits, must
be reimbursed solely out of its own income and subject to its own benefits.
The advantages of the parent can't infringe for recompense of its
subordinate's liabilities regardless of even on failure of the project

Project finance has following features:

 Capital intensive
 Leverages
 Separate entity treatment
 Long term projects
 Costly in term of fund raising
 Creation of special purpose vehicle (SPV)
Corporate finance vs. project finance

Corporate financing alludes to the money related administration of a

general organization like choosing the financial model of an organization at
that point raising the account and ideal use of assets and upgrading the
working of the organization though venture financing alludes to taking
monetary choice for a task like wellsprings of assets, contract with
merchants and arrangement.

In an association where corporate fund is used, the target of rehearsing it is

to expand the abundance of the investors. Corporate account
fundamentally manages the wellsprings of assets and how the ideal capital
structure will be accomplished.

Key differences

 Guarantee

In case of corporate finance, guarantee of finance is assets of company

unlike assets of project in case of project finance

 Accounting treatment

Corporate finance based treatment on the balance sheet but project

finance off the balance sheet

 Leverage

In corporate fiancé leverage is based on factors like wealth of

shareholders, indifference point but in project finance it is based on future
cash flows

 Variables

Corporate finance is based on variables like goodwill, CRM etc. but project
finance is based on future cash flow of the project.
We cannot put project finance under the category of corporate finance
because corporate finance is something related to overall fiancé of entity. It
focus on efficient utilization of money In terms of taking efficient decisions
like investment decisions , dividend decisions etc. finance is surely based
on asset guarantee of the firm. But in case of project finance, there is
creation of a Special purpose vehicle who is termed as project owner
having separate entity. Hence assets of parent company cannot be
claimed. Sponsors or lenders invest money into project after looking future
cash flow perspective of the project only not goodwill or any other variable
of parent company.

Q-3- Define 20 terminology related to project finance?

ANS- Terminologies related to project finance are:

All-in-cost: it is a term which is used to describe the total cost of the

project. It states whether project gives due profits or not
Amortization- it refers to an amount which shows gradual decrease in
capital expense over the course of time
Angel capital – it refers to equity capital provided by an investors (angel
investors) seeking good return from the project. Return generally seek is
25% or more
Bid bond- it refers to bond of varying 1 to 3% of the contract price issued
by bidders in guarantee of entering into the contract
Bridge financing – generally a finance which take place before the
company seeks long term finance. Finance which helps in raising long term
finance called bridge financing.
Claw back – it refers to the ability to get prior cash flow from the project to
distribute among investors
Contingency- it refers to uncertainty. An amount kept aside against cash
flow to meet uncertain situations
Off balance sheet – it refers to those assets and liabilities that do not
appear on balance sheet of the entity but belong to that very entity
Debt service- it refers to amount of debt and interest it duly carries
Debt service coverage – it shows to which extent there is sufficient cash
available to meet debt obligation. It is ratio between cash flow to debt
service.
Escrow account – it an account where funds are hold on the account of
trust and release on occurrence of events agreed
Finance lease- it is an agreement in which in the person holding property
also get due share in financial risk like rental payment
Sinking fund – An amount of money put aside to meet certain costs
incurred in respect of a project.
Buyer Credit - A credit facility granted by a group of banks to a buyer of
capital equipment and guaranteed by an Export Credit Agency
Non-recourse finance – it is kind of funding which includes repayment
from profits of project not from assets of borrower.
Net present value – it refers to difference between discounted cash
inflows and initial cash outlays of the project. it must be greater than zero to
attract investors
Novation – it refers to transfer obligations from one to another. Like new
debtors in place of old debtors.
Off shore equity – it refers to an entity which is operating beyond
boundary of tax regime of a country
Mezzanine Financing – it is financing which is similar to debt capital and
provides lender with an option to convert into equity in case of default
EPC contract – it is a kind of contract between company and contractor
where by contractor bears all engineering and construction activities to
deliver completed project
Q-4- What is non resource debt/ loan? What is mezzanine finance
explain with an example?

ANS- 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. This is one
instance where the borrower does not have personal liability for the loan.

 Because in many cases the resale value of the collateral can dip below the
loan balance over the course of the loan, non-recourse debt is riskier to the
lender than recourse debt.

KEY TAKEAWAYS

 Non-recourse debt is a type of loan that is secured by collateral,

which is usually property. 

 Lenders charge higher interest rates on non-recourse debt to

compensate for the elevated risk (i.e., the collateral's value dipping
below the amount owed on the loan).

 Non-recourse debt is characterized by high capital expenditures, long

loan periods, and uncertain revenue streams.

 Loan-to-value ratios are usually limited to 60% in non-recourse loans.

Recourse debt allows the lender to go after the borrower for any balance
that remains after liquidating the collateral. For this reason, lenders charge
higher interest rates on non-recourse debt to compensate for the elevated
risk.

Recourse vs. Non-recourse Debt

Recourse debt gives the creditor full autonomy to pursue the borrower for
the total debt owed in the event of default. After liquidating the collateral,
any balance that remains is known as a deficiency balance. The lender
may attempt to collect this balance by several means, including filing a
lawsuit and obtaining a deficiency judgment in court. If the debt is non-
recourse, the lender may liquidate the collateral but may not attempt to
collect the deficiency balance.

For example, consider an auto lender who loans a customer $30,000 to

purchase a new vehicle. New cars are notorious for declining precipitously
in value the minute they are driven off the lot. When the borrower stops
making car payments six months into the loan, the vehicle is only worth
$22,000, yet the borrower still owes $28,000.

The lender repossesses the car and liquidates it for its full market value,
leaving a deficiency balance of $6,000. Most car loans are recourse loans,
meaning the lender can pursue the borrower for the $6,000 deficiency
balance. In the event it is a non-recourse loan, the lender forfeits this sum.

What Is Mezzanine Financing?

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.

Mezzanine debt has embedded equity instruments attached, often known

as warrants, which increase the value of the subordinated debt and allow
greater flexibility when dealing with bondholders. Mezzanine financing is
frequently associated with acquisitions and buyouts, for which it may be
used to prioritize new owners ahead of existing owners in case of
bankruptcy.

Advantages of Mezzanine Financing

Mezzanine financing may result in lenders–or investors–gaining equity in a

business or warrants for purchasing equity at a later date. This may
significantly increase an investor's rate of return (ROR). In addition,
mezzanine financing providers receive contractually obligated interest
payments monthly, quarterly, or annually.

Example of Mezzanine Financing

For example, 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.

Q-5- Explain in detail which sector or projects is covered under the

field of project finance?

ANS- Project finance is the long-term financing of infrastructure and

industrial projects based upon the projected cash flows of the project
rather than the balance sheets of its sponsors. Usually, a project financing
structure involves a number of equity investors, known as 'sponsors', and
a 'syndicate' of banks or other lending institutions that provide loans to the
operation. They are most commonly non-recourse loans, which
are secured by the project assets and paid entirely from project cash flow,
rather than from the general assets or creditworthiness of the project
sponsors, a decision in part supported by financial modeling see Project
finance model. The financing is typically secured by all of the project
assets, including the revenue-producing contracts. Project lenders are
given a lien on all of these assets and are able to assume control of a
project if the project company has difficulties complying with the loan terms.
Generally, a special purpose entity is created for each project, thereby
shielding other assets owned by a project sponsor from the detrimental
effects of a project failure. As a special purpose entity, the project
company has no assets other than the project. Capital contribution
commitments by the owners of the project company are sometimes
necessary to ensure that the project is financially sound or to assure the
lenders of the sponsors' commitment.

Generally project finance is related to that very projects that requires a

great level of

 Investment
 Series of cash flows
 Need to create special purpose vehicle

Hence there are many factors where need of project finance can be seen
like

 Water sector

Investments in water sector is large whereas cash flows are quite

predictable and spread over a long period of time. There are many
opportunities in water sector in terms of-

 Waste water treatment

 Desalination
 Dams construction etc.

Long-term repayment has the added benefit of sharing the cost of finance
with users over the life of the asset

 Energy sector

Project finance can be used in energy sector because

 There are lot of infrastructural projects

 it will gives an impetus to private sector
  cash flows from energy sector projects are quite predictable
and require large amount of fund

Example of projects:

 oil and gas

 thermal plants
 Nuclear power plants etc.

 Transport sector

Transport sector is very popular sectors in terms of project finance. There

are lot of opportunities available for investors. As transport sector projects
are large enough and require good sum of money with an assurance of
steady cash flows which can attract more and more investors in this sector.
Projects available in transport sector are:

 Rail infrastructure
 Roads
 Bridges
 Airports
 Sea ports etc.

 Healthcare sector

Health care sector has gain momentum these days. Now health has
become a critical issue of our lives. There is great demand for medical
services. So projects in health care sectors go well with project finance.
They too requires large amount of money to be invest and has a
capability to give good return on investment these days. Project can be
like

 New health care facilities

 Refurbishment etc.