FI 12 Project Financing

Question 1

Define project financing

Answer 1

Refers to financing of a construction project on a stand-alone basis

Question 2

Characteristics of projects

Answer 2

Often separate legal entities
Sponsors benefit from profits in proportion to their equity investment
Projects have their own debt obligations which are separate from debts of the sponsoring organizations

Question 3

What do entities prefer when looking for financing? Why?

Answer 3

debt - so they can retain control of the organization. debt also has fixed rate of return.

Question 4

What are most project financing loans known as? how are they secured?

Answer 4

non-recourse. secured with collateral representing the project’s assets and are paid from project’s cash flow. lenders given lien on all project’s assets.

Question 5

How do lenders advance funds

Answer 5

Draws - a little at a time, reducing exposure

Question 6

Two types of debt

Answer 6

Senior - repaid before all other creditors

Mezzanine - repaid before equity but after other types of debt

Question 7

What are completion and QA arrangements? Two types of risks mitigated.

Answer 7

require sponsors to guarantee that the project will be completed on time and meet certain spec or QA requirements. Otherwise project funds will be repaid.

Capital and technological risk.

Question 8

Raw mat supply arrangements

Answer 8

Sponsors guarantee supply of raw mats

Question 9

Output or service purchase arrangements

Answer 9

one or more sponsors will buy the output of the project - usually this is when they are the main clinents

Question 10

cash flow guarantee arrangements

Answer 10

sponsors guarantee project against default by providing any shortfall in cash
covers lending risks

Question 11

adv of project financing

Answer 11

• sponsors can share benefits from same project
• sponsors can share risks of a new project
• sponsors can expand debt capacity beyond what is possible with direct financing
• sponsors can share business and financial risk

Question 12

disadv of project financing

Answer 12

• arrangements are complex and expensive
• project financing sometimes requires guarantees from a financial institution, resulting in hugher fees
• if entity requires multiple sponsors, profits have to be shared with them
• higher finacning costs as the project financing is riskier