Project Financing

Question 1

Project financing

Answer 1

Project financing refers to the financing of a construction project on a stand-alone basis.

Question 2

How project financing is set up

Answer 2

one or more sponsors who provide the required equity capital and one or more lenders (a syndicate of lenders) to provide the debt to fund the capital requirements.

Question 3

Project financing - legal type

Answer 3

Projects are often operated as separate legal entities

Question 4

Project sponsors

Answer 4

benefit from the project’s profits in proportion to their equity investment

Question 5

Equity contributions

Answer 5

Equity financing requires the project sponsors to contribute cash or other resources in return for a proportional ownership in the project.

Question 6

Debt financing non-recourse loans - MOST COMMONLY

Answer 6

secured with collateral representing the project’s assets and are paid from the project’s cash flow, rather than from the general assets or creditworthiness of the sponsor(s).

Question 7

Project financing loans interest

Answer 7

have higher interest

Question 8

draws

Answer 8

Lenders will advance funds progressively, based on periodic requests from the borrower as the project progresses -he borrower only pays interest on the actual funds that have been drawn as the project proceeds

Question 9

Senior debt: - Types of debt

Answer 9

the senior debt lender will receive payment before other creditors of the project.

Question 10

Mezzanine debt: - Types of debt

Answer 10

has priority over equity but is subordinate to other types of debt - SECOND

Question 11

Debt financing

Answer 11

the repayment of debt is the operating cash flows that the project will generate once it is completed.

Question 12

Types of financing arrangements

Answer 12

Completion and quality assurance arrangements
Raw material supply arrangements
Output or service purchase arrangements
Completion, quality assurance, and purchase arrangements
Cash flow guarantee arrangements

Question 13

Completion and quality assurance arrangements

Answer 13

TIME
Quality
Specification if not met pay debt IMMEDIATELY

Question 14

Raw material supply arrangements

Answer 14

require one or more of the sponsors to guarantee the supply of raw materials for the project during or after completion

Question 15

Output or service purchase arrangements

Answer 15

sponsors guarantee to purchase part or all of the output or services that a project produces. Failure to purchase as agreed obligates the guarantor to pay the debt and compensate other sponsors.

sponsors are the primary customers

guarantees against the risk that a product or service may not be saleable in the future at a price that ensures demand

Question 16

Completion, quality assurance, and purchase arrangements

Answer 16

provide guarantees against key risks associated with a project the risk of flood, fire, storm, theft, and other factors

Question 17

Cash flow guarantee arrangements

Answer 17

the sponsors effectively guarantee a project against default.