5. Project Finance Flashcards
Project Finance
Off balance sheet financing where assets are carved out into a separate entity and financed on their own merits. Project financing structure involves a number of equity investors, known as ‘sponsors’, as well as a ‘syndicate’ of banks or other lending institutions that provide loans to the operation. Project is typically secured by all of the project assets, including the revenue-producing contracts
Construction Finance
Obtaining the capital resources to finance the costs of construction
Sponsor
Organization holding equity in the project. Often the party putting up initial risk capital, the developer of the asset, vendor selling equipment or some other stakeholder who controls the completion of the project. Sometimes, the sponsor contributes a substantial portion of their equity in the form of upfront risk and “sweat equity”, but may also have to provide some additional cash equity to facilitate the completion of the deal
Equity
Can refer to different forms of equity (Preferred, convertible or common). Preferred equity or convertible can have payout characteristics similar to debt unless and until it is converted at some conversion price. Equity with higher preference/more protection should be willing to receive a lower return on capital, with common equity having highest expected return for taking biggest share of risk.
Debt
Project finance companies typically provide the debt portion. Debt financing is typically the most senior portion of the financing structure (“senior financing”), which means that it has the first claim on the cash flows and assets of a project in order to be repaid. Typically, junior financing (other forms of debt and equity), will only get paid out once the senior financing has been satisfied.
IRR
Discount rate that makes NPV of all cash flows from a particular project equal to zero. Generally speaking, the higher a project’s internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering
EPC
Engineering, procurement and construction. Under an EPC contract, contractor designs the installation, procures the necessary materials and builds the project, either directly or by of the work
PPA
A PPA is the principal agreement that defines the revenue and credit quality of a generating project and is thus a key instrument of project finance
REC
Renewable Energy Certificate represents the property rights to the environmental, social, and other non-power qualities of renewable electricity generation. Can be sold separately from the underlying physical electricity associated with a renewable-based generation source
Off-Take Agreement
Off-take agreement is an agreement between project company and off-taker (party buying the product/service delivered. Revenue is often contracted on a long term basis rather than sold on a merchant basis and provides project company with stable and sufficient revenue to pay its debt obligation, cover operating costs and provide certain required return to the sponsors. Types include take-or-pay, and PPA
Merchant Power
In “merchant power” projects, lenders are able to receive assurance of the project’s ability to repay its debt by focusing on commodity hedging, collateral values, and the income to be produced based on historical and forward-looking power price curves and fully developed markets.
Warranties
Warranties are provided by component suppliers to mitigate risks in a project
Security
Collateral security package, in the absence of recourse to the Sponsor, serves as the basis for the lenders’ securing repayment in the case of default. Specifically, all assets of Project Company owned at time of the loan closing, in addition to those acquired post-closing, will be pledged to the lenders until loans are fully repaid
Debt Service Coverage Ratio
Amount of cash flow available to meet annual interest and principal payments on debt. Lenders will want to see the debt service covered with a meaningful margin in order to feel safe that the project will remain solvent and viable– a ratio of substantially more than 1.0x.
PTC
Production Tax Credit. Available for the production and sale of electricity from certain renewable sources (based on the amount of electricity generated and sold to an unrelated party). Renewable sources qualifying include wind, biomass, geothermal, municipal solid waste, hydropower (newly installed turbines), marine and hydrokinetic energy. For qualification facility must have been “placed in service” before Jan 1, 2013 for a wind facility and Jan 1 2014 for other qualifying facilities & must be in the US.
