2. Approach To Financing In Infustructure Projects Flashcards
What is project finance in infrastructure projects?
Project finance isolates cash flows, assets, and risks from sponsors, relying on project revenues as the primary repayment source. (Lesson 2, p.1)
What is a Special Purpose Vehicle (SPV) in project finance?
An SPV is a separate legal entity created to execute and manage a specific project, isolating financial risk from sponsors. (Lesson 2, p.1)
How does an SPV isolate financial risk?
An SPV is legally separate from its parent company, limiting liability to the assets within the SPV. Creditors cannot pursue parent company assets if the project fails. (Lesson 2, p.2)
What are the benefits of an SPV holding project assets?
It enhances transparency for investors, ensuring clear ownership of project-related assets and liabilities. (Lesson 2, p.2)
How does an SPV facilitate project financing?
An SPV enables nonrecourse or limited-recourse financing, where project cash flows alone are used for debt repayment. (Lesson 2, p.2)
Why is cash flow management important for an SPV?
An SPV prioritizes cash flows for operational expenses, debt servicing, and investor returns, reducing default risk. (Lesson 2, p.2)
What types of contracts does an SPV enter into?
SPVs manage contracts like EPC agreements, O&M agreements, and offtake agreements to allocate risk effectively. (Lesson 2, p.3)
How do SPVs attract investors through partnerships?
SPVs allow various stakeholders to invest with defined roles and ownership shares, making large projects more viable. (Lesson 2, p.3)
How does an SPV enable regulatory and tax efficiency?
SPVs are often structured in tax-friendly jurisdictions, optimizing returns for investors. (Lesson 2, p.3)
What are the advantages of limited liability in an SPV?
Investors in an SPV are only liable for their invested capital, reducing their exposure to project losses. (Lesson 2, p.3)
How does an SPV enable exit strategies?
An SPV simplifies asset transfers and sales, making it easier for investors to exit without affecting the parent company. (Lesson 2, p.3)
Why is transparency important in SPVs?
Clear financial reporting in an SPV improves investor and lender confidence, ensuring better oversight of project performance. (Lesson 2, p.4)
What are common SPV ownership structures?
SPVs can have sole sponsorship, joint ventures, or equity classes, depending on investor risk preferences. (Lesson 2, p.4)
How do equity investors contribute to an SPV?
Equity investment provides capital for project costs and serves as a risk buffer before debt financing. (Lesson 2, p.4)
What types of investors participate in SPVs?
Institutional investors, private equity firms, corporate sponsors, and high-net-worth individuals invest in SPVs. (Lesson 2, p.4)
What are the key contracts in an SPV?
Project development agreements, offtake contracts, construction agreements, and financing agreements govern an SPV. (Lesson 2, p.5)
What financing options are available for SPVs?
SPVs use a mix of equity, debt, mezzanine financing, and grants to fund projects. (Lesson 2, p.5)
How do offtake agreements help SPVs?
Offtake agreements guarantee revenue streams by securing buyers for the project’s output. (Lesson 2, p.5)
What role do covenants play in SPV financing?
Lenders impose covenants requiring the SPV to maintain performance metrics, such as debt service coverage ratios. (Lesson 2, p.5)
What are the benefits of risk segmentation in SPVs?
Risk isolation ensures that financial obligations are limited to the SPV, protecting parent companies and stakeholders. (Lesson 2, p.6)
How do SPVs achieve financial flexibility?
Flexible financing structures allow SPVs to adapt to market fluctuations and cash flow variations. (Lesson 2, p.6)
What is the significance of cash flow forecasting in an SPV?
Accurate forecasting helps prevent liquidity shortfalls and aligns capital planning with project milestones. (Lesson 2, p.6)
How do SPVs manage operational expenses?
SPVs negotiate contracts to optimize costs, improving cash flow margins and financial stability. (Lesson 2, p.6)
What are the common exit strategies for SPV investors?
SPV investors exit through IPOs, asset sales, secondary market sales, or redemption of shares. (Lesson 2, p.7)
What challenges do SPVs face?
SPVs face legal complexities, regulatory compliance issues, and reliance on third-party contract performance. (Lesson 2, p.7)
