Objectives

To understand what project financing is

and what steps are involved in securing and
managing it.
What is Financial Management?
Concerns with the acquisition,
financing, and management of
resources with some overall goal in
mind.

It refers the efficient and effective management of money

(funds) in such a manner as to achieve the goals of the
organization.
Goals of finance
Investment Decision
Financing Decision (Debt, Self or Equity)
Resource Management Decision

Capital Structure
Self funding = 51%
Debt = 30%
Equity = 19%
 Investment Decisions
Most important of the

• three decisions.
• What is the optimal firm size?
What specific assets should be
• acquired?
What assets (if any) should be
reduced or
 Financing Decisions
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).
• What is the best type of financing?
• What is the best financing mix?
• What is the best dividend policy (e.g.,
dividend-payout ratio)?
• How will the funds be physically
acquired?
 Asset Management
Decisions
• How do we manage existing assets
efficiently?
• Financial Manager has varying degrees
of operating responsibility over
• assets.
Greater emphasis on current asset
management than fixed asset
management.
What is the Goal
of the Firm?
Maximization of
Shareholder Wealth!

Value creation occurs when

we maximize the share
price for current
shareholders.
What is 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.
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.
Limited Recourse Debt
Limited recourse debt is a debt in which the creditor
has limited claims on the loan in the event of default.
Limited recourse debt sits in between secured bonds
and unsecured bonds in terms of the backing behind
the loan
Project financing
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.
What Is Non-Recourse Debt?

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.
Recourse vs. Non-Recourse Loans: An
Overview
 A recourse loan allows a lender to pursue additional assets of a
borrower who defaults if the balance of the debt surpasses the value of
the collateral. A non-recourse loan permits the lender to seize only
the collateral specified in the loan agreement, even if its value does
not cover the entire debt.1

 Either type of loan may be collateralized. That is, the loan agreement
will specify that the lender can seize and sell certain property or
properties of the borrower to recoup its money in cases of default.

 However, a recourse debt gives the lender the recourse to pursue

additional assets of the borrower beyond the value of the collateral if
it is necessary to recoup its losses on the loan.
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.
 Project debt is substantially more expensive 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.