3. Financing Instruments Flashcards
Front
Back
What is equity financing in project finance?
Equity financing involves funds contributed by project sponsors or investors in exchange for ownership. It serves as the initial capital base to attract debt financing. (Lesson 3, p.1)
Who are the main sources of equity financing?
- Project Sponsors, 2. Institutional Investors, 3. Government Participation in PPPs. (Lesson 3, p.1)
What are the key characteristics of equity financing?
- Higher Risk, Higher Return, 2. Control and Decision-Making, 3. Dividend Payments based on cash flow availability. (Lesson 3, p.1)
What are the advantages of equity financing?
- No Fixed Repayment Obligations, 2. Acts as a Risk Cushion, 3. Improves Creditworthiness for attracting debt. (Lesson 3, p.1)
What are the challenges of equity financing?
- Higher Cost of Capital, 2. Dilution of Control among multiple investors. (Lesson 3, p.1)
What is debt financing in project finance?
Debt financing involves borrowing funds that must be repaid with interest. It is typically structured as non-recourse or limited-recourse debt. (Lesson 3, p.2)
What are the main types of debt financing?
- Bank Loans, 2. Project Bonds, 3. Multilateral Loans, 4. Vendor or Supplier Credit. (Lesson 3, p.2)
What are the key characteristics of debt financing?
- Lower Cost of Capital, 2. Repayment Priority, 3. Fixed or Variable Interest Rates. (Lesson 3, p.2)
What are the advantages of debt financing?
- Leverage for equity holders, 2. Tax Deductibility of Interest, 3. Enforces Financial Discipline. (Lesson 3, p.2)
What are the challenges of debt financing?
- Repayment Risk, 2. Risk of Default, 3. Restrictive Financial Covenants. (Lesson 3, p.2)
How is equity and debt blended for optimal financing?
Projects aim for a balanced debt-to-equity ratio, commonly around 70:30, to minimize capital costs while ensuring risk coverage. (Lesson 3, p.3)
What is the role of cash flow waterfalls in project finance?
Cash flows are structured so that operating expenses are paid first, followed by debt service, reserves, and equity dividends. (Lesson 3, p.3)
What are the main approaches to financing infrastructure projects?
- Self-Funding (Equity Financing), 2. Debt Financing, 3. SPV-based Financing, 4. Public-Private Partnerships, 5. Grants and Subsidies. (Lesson 3, p.4)
How does an SPV help in infrastructure financing?
An SPV isolates the project’s financial risks, attracts non-recourse financing, and holds key project contracts. (Lesson 3, p.4)
What is Public-Private Partnership (PPP) financing?
PPP financing involves collaboration between governments and private sector entities, sharing risks and financing obligations. (Lesson 3, p.4)
What are the benefits of grants and subsidies in project financing?
Grants reduce financing costs and improve project viability, often provided by governments or international institutions. (Lesson 3, p.4)
What is the Build-Operate-Transfer (BOT) model?
A private entity builds, operates, and later transfers a project to the government after recouping investment. (Lesson 3, p.5)
What is blended financing in project finance?
Blended finance involves combining multiple sources like equity, debt, and grants to optimize funding structures. (Lesson 3, p.5)
What is vendor financing in infrastructure projects?
Vendor financing allows contractors to defer payments, reducing the initial capital burden on project sponsors. (Lesson 3, p.5)
What are the challenges of financing infrastructure projects?
- High Capital Requirements, 2. Market and Regulatory Risks, 3. Long Payback Periods. (Lesson 3, p.5)
How do project bonds work in infrastructure financing?
Project bonds are issued to raise capital from investors, offering long-term debt financing with fixed returns. (Lesson 3, p.5)
What role do financial covenants play in project finance?
Financial covenants ensure cash flow sustainability by setting conditions like minimum debt service coverage ratios. (Lesson 3, p.6)
How does tax efficiency impact project financing?
Projects structured in tax-friendly jurisdictions can minimize tax liabilities, improving investor returns. (Lesson 3, p.6)
What is the importance of financial modeling in project finance?
Financial models assess risks, forecast cash flows, and determine funding needs for project sustainability. (Lesson 3, p.6)
