Project Feasibility

&Finance

www.greybricks.com
Due Diligence
• In the project finance business, deal origination happens by the
direct relationship that relationship managers across different
sectors enjoy in the industry.

• Proposals are presented in the form of appraisal notes put up to

either the credit committee or a committee of senior
management, whichever is the appropriate sanctioning authority.

• Due diligence in project finance involves thoroughly reviewing all

proposals involved in a deal.
Appraisal Note
• An appraisal note ideally contains:
– a write up on the company background,
– its management and shareholding pattern,
– its physical and financial performance,
– purpose of funding
– details of project being funded
– costs involved and means of financing
– market for company’s products
– future prospects and profitability projections
– risk analysis
– and the terms and conditions of sanction.
Due Diligence
• Due diligence in project finance is a process that consists of
multiple steps to ensure the most comprehensive analysis:
– Assessment of promoter history and background
– Evaluation of the company and project business model
– Legal due diligence
– Analysis of financial statements and structure
– Determine major risks associated with the project
– Analysis of tax effects
– Credit analysis and evaluation of loan terms
– Project valuation
Due Diligence – Key Focus Area
• Assessment of promoter history and background
– Assessment of group companies
– Track record of sponsors
– Management profile of sponsor companies
– Study of shareholder agreement (voting rights,
representation of Board of Directors, clauses pertaining to
protection of minority interest, dispute resolution etc.)
– Analysis of tax effects
– Management structure of project company
Due Diligence – Key Focus Area
• Evaluation of the Company and Project Business Model
– Understanding the assumptions
– Assessment of the assumptions
– Analysis of project cost
– Sensitivity analysis
– Benchmarking with the industry
Due Diligence – Key Focus Area
• Legal Due Diligence
– Determining the rights and liabilities of the different
participants within the project scope
– Analyzing the schedule and implementation plan of the
project
– Evaluating the appropriateness of liquidated damages if
the project fails to deliver as promised
Due Diligence – Key Focus Area
• Analysis of Financial Statements and Structure
– Debt equity ratio
– Principal repayment schedule
– Sinking fund build up - Build-up of a sinking fund or Debt
Service Reserve Account is usually established in order to
safeguard the lenders’ interests. Such a fund entails
deposit of a certain amount in a designated reserve
account which is used towards debt servicing in the event
of a shortfall in any year/quarter of the debt repayment
period.
Due Diligence – Key Focus Area
• Analysis of Financial Statements and Structure (continued)
– Trust and retention mechanism - Safeguard the lenders’ interest.
• The mechanism entails all revenues from the company to be
routed to a designated account.
• The proceeds thus credited to the account are utilized
towards payment of various dues in a predefined order of
priority.
• Generally, the following waterfall of payments is established:
statutory payments including tax payments, operating
expenditure payments, capital expenditure payments, debt
servicing, dividends and other restricted payments.