6. Role Of Financial Institutions And Project Contracts Flashcards
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What is the role of financial institutions in project financing?
Financial institutions provide funding, risk management, investment appraisal, and regulatory compliance for construction projects. (Lesson 6, p.1)
What are the main types of financing offered by financial institutions?
- Traditional loans, 2. Lines of credit, 3. Project-specific financing, 4. Bonds, 5. Private equity, 6. Mezzanine financing. (Lesson 6, p.1)
How do financial institutions assess project viability?
They evaluate cost estimates, revenue projections, market conditions, and project feasibility before extending credit. (Lesson 6, p.1)
What is loan syndication in project financing?
A financing method where multiple lenders pool resources to fund a large project, reducing individual risk. (Lesson 6, p.2)
What is project financing?
A financing structure where the project itself serves as collateral, with repayments made from project cash flows. (Lesson 6, p.2)
What are the key risk management strategies used by financial institutions?
- Due diligence, 2. Feasibility assessments, 3. Risk-sharing mechanisms, 4. Insurance policies, 5. Performance bonds. (Lesson 6, p.2)
What are the different types of project contracts in financing?
- Offtake Agreements, 2. Supply Agreements, 3. Construction Contracts, 4. O&M Agreements, 5. Financing Agreements, 6. Shareholders’ Agreements. (Lesson 6, p.3)
What is an offtake agreement?
A contract ensuring a buyer for a project’s output, reducing market risk. Examples: Power Purchase Agreements (PPAs), Take-or-Pay contracts. (Lesson 6, p.3)
What is an EPC contract?
Engineering, Procurement, and Construction (EPC) contracts ensure project completion under a fixed price and timeline. (Lesson 6, p.3)
What is an O&M agreement?
Operations and Maintenance (O&M) agreements define roles for long-term asset management and compliance. (Lesson 6, p.3)
What is a financing agreement?
A contract governing loan terms, repayment schedules, interest rates, and lender protections. (Lesson 6, p.4)
What is a cash flow waterfall in project finance?
A structured order of cash allocation, prioritizing OPEX, debt service, reserve funds, and equity distributions. (Lesson 6, p.4)
What are the key risk allocations in project finance?
- Construction Risk - allocated to EPC contractors, 2. Operational Risk - to O&M operators, 3. Market Risk - to off-takers, 4. Political Risk - to sponsors. (Lesson 6, p.4)
What are financial covenants in project finance?
Lender-imposed requirements ensuring project financial stability, such as DSCR, LLCR, and debt-to-equity ratios. (Lesson 6, p.5)
What is the Debt Service Coverage Ratio (DSCR)?
A measure of a project’s ability to cover debt payments with cash flow. Typically required to be above 1.2x. (Lesson 6, p.5)
What is the Loan Life Coverage Ratio (LLCR)?
A ratio measuring a project’s ability to cover debt over its lifetime, ensuring long-term financial viability. (Lesson 6, p.5)
What is the Debt-to-Equity Ratio in project finance?
A measure of financial leverage, typically capped at 70:30 to ensure balanced capital structuring. (Lesson 6, p.5)
What is the role of reserve requirements in project financing?
Reserve accounts (e.g., debt service and maintenance reserves) provide financial buffers for unexpected costs. (Lesson 6, p.5)
What are common exit strategies in project finance?
- Sale to Strategic Investors, 2. Refinancing, 3. Initial Public Offering (IPO), 4. Secondary Market Sale, 5. Buyback Agreements. (Lesson 6, p.6)
What is refinancing in project finance?
Replacing existing debt or equity with new financing to improve terms or recover capital. (Lesson 6, p.6)
What is an IPO exit strategy?
Listing the project or its holding company on a stock exchange, providing liquidity for investors. (Lesson 6, p.6)
What is the role of risk allocation in project financing?
Distributing risks among lenders, sponsors, contractors, and operators based on expertise and risk tolerance. (Lesson 6, p.6)
How do financial institutions ensure compliance in project financing?
They oversee adherence to zoning laws, environmental regulations, labor laws, and financial covenants. (Lesson 6, p.6)
What is the importance of financial intermediation in project finance?
Financial institutions connect investors with developers and provide advisory services for structuring financing. (Lesson 6, p.6)
