Mod 7 - Project Financing

Question 1

What is project financing

Answer 1

Project finance is that lenders loan many for the development of a specific project solely based on that specific projects risk and future cash flows. Only the project providing security for the loan.

Question 2

Compare recourse vs. non-recourse

Answer 2

Recourse allows lenders access capital or assets of the sponsor(developer) to repay debt, while non-recourse a has no recourse to the sponsor and restricted to the project company.

Question 3

Suitability for project financing.

Answer 3

“1. Capital-intensive

2. Highly leveraged: Usually 65% - 80%
3. Long term: 15- 20 years long life assets such as power plants
4. Entity specific cash flows: Assets operate on stand alone basis - with discrete cash flows
5. Multiple participants.”

Question 4

Key advantages of high leverage for Sponsors

Answer 4

“• Lower initial equity injection requirements;
• Enhanced shareholder equity returns, through a lower cost of capital being achieved,
due to the high degree of debt financing being utilized; as well as
• Debt finance interest may be deductible for tax purposes, thereby further reducing the
after-tax weighted, average cost of capital of the Project Company.”

Question 5

How do lenders lower risk in Project financing

Answer 5

As lenders are restricted only to the assets of the project company they place additional reliance on the performance of a project and place covenants to restrict lending and the dividend policy.

Question 6

Covenants placed by lenders

Answer 6

“• Covenants regarding the distribution of funds to lenders and sponsors, including a stated distribution policy. The ordering of the flow of funds is as follows:
• Payment of project specific operating and capital costs;
• Payment of scheduled interest and principal payments;
• Distribution of residual profits to the project sponsors, in accordance with the governing agreements.
• Covenants regarding the operations of the business”

Question 7

Define Public private placement partnerships

Answer 7

“specific form of Project Finance where a public service
is funded and operated through a partnership of government and the private sector, typically structured under a long-term concession arrangement.”