1. Introduction To Infastructure Project Finance Flashcards
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What is Infrastructure Project Finance?
Infrastructure project finance is a specialized funding method used to finance long-term infrastructure projects such as transportation systems, power generation, and oil and gas projects. Repayment is based on the project’s cash flow rather than on the overall financial health of the sponsoring company. (Lesson 1, p.1)
What is Project Finance?
Project finance is a funding method that finances long-term infrastructure and industrial projects using a nonrecourse or limited-recourse financial structure. The repayment of debt is primarily dependent on the project’s cash flow. (Lesson 1, p.1)
What is Nonrecourse Debt in Project Finance?
A nonrecourse loan means that the lender can only seize the collateral (project assets) in case of default, but cannot pursue the borrower’s personal assets. (Lesson 1, p.1)
What is Off-Balance Sheet Financing in Project Finance?
Off-Balance Sheet (OBS) financing allows a company to fund major projects without impacting its credit rating, as the debt does not appear on the company’s balance sheet. (Lesson 1, p.2)
What is an SPV in Project Finance?
A Special Purpose Vehicle (SPV) is a separate legal entity created for a specific project, which isolates financial risk from the parent company. (Lesson 1, p.2)
Formula for Debt Service Coverage Ratio (DSCR)?
DSCR = Net Operating Income / Total Debt Service. Net Operating Income (NOI) is revenue generated by the project minus operating expenses. Total Debt Service includes principal and interest payments due within a given period. (Lesson 1, p.3)
What are the main components of project finance?
- Project cash flow dependency, 2. Risk allocation and management, 3. Long-term financing structure, 4. Limited or nonrecourse debt. (Lesson 1, p.4)
How can risks in project finance be mitigated?
- Contracts (Power Purchase Agreements, Offtake Agreements), 2. Insurance and guarantees, 3. Diversification of funding sources. (Lesson 1, p.5)
How do governments participate in project finance?
- Providing guarantees or subsidies, 2. Establishing legal and regulatory frameworks, 3. Engaging in Public-Private Partnerships (PPPs). (Lesson 1, p.6)
How does Project Finance differ from Traditional Corporate Finance?
Project finance isolates project risks, while corporate finance depends on the firm’s overall financial strength. (Lesson 1, p.6)
What are the key risk factors in project finance?
Key risks include construction risk, market risk, financial risk, and operational risk. (Lesson 1, p.7)
What is the purpose of risk allocation in project finance?
Risk allocation ensures that risks are assigned to the parties best able to manage them, reducing the impact of uncertainties. (Lesson 1, p.7)
What are the advantages of project finance?
- Enables large-scale projects, 2. Reduces financial risk for sponsors, 3. Limits liability through SPVs, 4. Increases investor confidence. (Lesson 1, p.8)
What are the disadvantages of project finance?
- High structuring costs, 2. Complex contracts, 3. Long approval processes, 4. Higher interest rates due to risk exposure. (Lesson 1, p.8)
What is the importance of financial modeling in project finance?
Financial modeling helps predict project viability, assess risks, and determine financing needs. (Lesson 1, p.9)
What is the Build-Operate-Transfer (BOT) model?
The BOT model allows a private entity to build, operate, and then transfer ownership of an infrastructure project to the government after a specified period. (Lesson 1, p.9)
How do investors earn returns in project finance?
Investors earn returns through equity participation, interest on project debt, and revenue-sharing agreements. (Lesson 1, p.10)
What role do lenders play in project finance?
Lenders provide debt financing and assess project risks before funding approval. They may impose conditions such as guarantees and covenants. (Lesson 1, p.10)
What is a loan-to-value (LTV) ratio in project finance?
The LTV ratio measures the loan amount relative to the project’s value, typically limited to 60% in nonrecourse financing. (Lesson 1, p.11)
What are the different sources of project finance funding?
- Equity financing, 2. Debt financing (bonds, loans), 3. Public-Private Partnerships, 4. Government grants. (Lesson 1, p.11)
What is a concession agreement in project finance?
A concession agreement grants a private entity the right to operate a public infrastructure project for a specified period. (Lesson 1, p.12)
What is the significance of cash flow forecasting in project finance?
Cash flow forecasting helps assess a project’s ability to meet financial obligations and secure investor confidence. (Lesson 1, p.12)
What is the impact of interest rate fluctuations on project finance?
Interest rate changes affect project financing costs, debt servicing, and overall financial viability. (Lesson 1, p.13)
How do Public-Private Partnerships (PPPs) function in project finance?
PPPs involve collaboration between government and private entities, sharing risks and rewards for infrastructure development. (Lesson 1, p.14)
What are credit enhancements in project finance?
Credit enhancements include guarantees, insurance, and reserve funds used to improve a project’s creditworthiness. (Lesson 1, p.14)
