Project Finance types and explanations.pptx

Project finance

1. Project Finance

2. Contents Introduction of Project Finance Project Finance Estimating the cost of project Feasibility Analysis Means of Finance Risk analysis & Mitigation Important Ratios in Project Finance

3. Contents Project Finance Modelling Project Finance Modelling Assumptions PFM -Income Statement PFM -Project Cost & IDC PFM - Dep PFM - Revisiting Income statement PFM – Balance- Sheet

4. Contents PFM - Cash flow PFM - Ratio Analysis PFM - Formatting PFM - Sensitivity Analysis Preparing Project finance report Conclusion

5. Introduction Project finance is method of financing Revenue generated by Single project Roads, Rails, Power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure.

6. Introduction Sponsor Special Entity Loans Equity Banks

7. Definition “Project finance may take the form of financing of the construction of a new capital installation, or refinancing of an existing installation, with or without improvements. In such transactions, the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the facility’s output, such as the electricity sold by a power plant. The borrower is usually an SPE (Special Purpose Entity) that is not permitted to perform any function other than developing, owning, and operating the installation. The consequence is that repayment depends primarily on the project’s cash flow and on the collateral value of the project’s assets.” Src : Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards ("Basel II"), November 2005.

8. Features Capital Intensive Highly Leveraged Long term Non Recourse/ Limited Recourse financing

9. Features Controlled Dividend Policy Many Participants Allocated Risks Costly

10. Project Fin Vs. Corporate Fin Dimension Corporate Fin Project Fin Capital Infinite time horizon – Permanent Finite – Matches life of project Cost of capital Lower Relatively Higher Credit Evaluation basis Financial health of entity, focus – Fin statements Economic & Technical feasibility Size of financing Flexible Requires critical mass to cover high transaction cost Dividend policy Autonomous from Investors & creditors Fixed dividend policy no reinvestment allowed

11. Project Fin Vs. Corporate Fin Dimension Corporate Fin Project Fin Financial structures Easily duplicated Highly tailored structures cannot be misused Capital Investment decisions Opaque to creditors Highly transparent to creditors

12. Structure

13. Importance of Project Finance Undertake projects w/o hampering ability to borrow for traditional projects Limited Financial Risk Raise more debts Stronger Incentives

14. Importance of Project Finance Technical & Economic Review Reduces dependency on alt funding Diversification

15. Types of Project Finance Greenfield Project Brownfield Project New Entrepreneur Project Diversification Expansion Project Modernization Project Replacement Project Forward Integration

16. Steps in Project Implementation Complete the project Enter the agreement Finance SPV Viability of Project Tender

17. Project Cost Cost of Project = Estimated cost of project + Contingencies

18. Elements of Project Cost Tangible Assets Technical Know-how Other Fixed assets Preliminary Expenses Pre-operative Exp Contingencies

19. Feasibility Analysis Testing Viability of project Legally & Technically Feasible Why? - Not all projects doable - Useful resources to be allocated smartly - Effective use of resources -

20. Feasibility Analysis Steps : - Market/ Demand Feasibility - Manpower Feasibility - Technical Feasibility - Economic Feasibility -

21. Feasibility Analysis Steps : - Legal Feasibility - Operational Feasibility - Financial Feasibility

22. Risk Analysis

23. Ratio & Other Fin Analysis Debt Service Coverage Ratio Fixed Asset Turnover Ratio Break even Analysis Cash flow waterfall Sensitivity Analysis Current Ratio

24. Ratio Analysis Debt Equity Ratio Debtors Turnover Ratio Creditors Turnover Ratio Operating Profit Ratio Net Profit Ratio ROI

25. Project Finance Modeling Future cash flows Degree of certainty Capacity to repay capital and provide a return Major tool

26. Project Finance Modeling Complete the assumptions Income Statement Worksheet Project Cost & IDC Sheet Dep Schedule Income Statement Balance Sheet Cash Flow Statement Ratio Analysis