Project Finance

Topics: Debt, Finance, Types of business entity Pages: 19 (6649 words) Published: May 20, 2013
Chapter 1
1.1 Introduction
Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. "Project finance" is a method for obtaining commercial debt financing for the construction of a facility. Lenders look at the credit-worthiness of the facility to ensure debt repayment rather than at the assets of the developer/sponsor. Farm biogas projects have historically experienced difficulty securing project financing because of their relatively small size and the perceived risks associated with the technology. However, project financing may be available to large projects in the future. In most project finance cases, lenders will provide project debt for up to about 80% of the facility's installed cost and accept a debt repayment schedule over 8 to 15 years. Project finance transactions are costly and often an onerous process of satisfying lenders' criteria. “Project finance involves the creation of a legally independent project company financed with non-recourse debt (and equity from one or more sponsoring firms) for the purpose of financing a single purpose capital asset, usually with a limited life.” This definition highlights the following features of Project Finance: Project Finance involves creating a legally independent project company to invest in the project; the assets and liabilities of the project company do not appear on the sponsors’ balance sheet. As a result, the project company does not have access to internally generated cash flows of the sponsoring firm. Similarly, the sponsoring firm does not have access to the cash flows of the project company. In contrast, in Corporate Finance, the same investment is financed as part of the company’s existing balance sheet. The purpose for Project Finance is to invest in a single purpose capital asset, usually a long-term illiquid asset. In contrast to a company, which may be investing in many projects simultaneously, a project-financed company invests only in the particular project for which it is created. The project company is dissolved once the project gets completed. In Project Finance, the investment is financed with non-recourse debt. Since the Project Company is a standalone, legally independent company, the debt is structured without recourse to the sponsors. As a result, all the interest and loan repayments come from the cash flows generated from the project. This is in contrast to Corporate Finance where the lenders can rely on the cash flows and assets of the sponsor company apar99t from those of the project itself. Project companies have very high leverage ratios compared to public companies. Esty (2003b) points out that the average project company has a leverage ratio of 70% compared to 33.1% for similar sized firms listed in the Composted database. The majority of project debt comes from bank loans. Esty (2005) shows that bank loans comprise around 80% of project debt. 1.2 Disadvantage

Project financings are extremely complex.
It may take a much longer period of time to structure, negotiate and document a project financing than a traditional financing, and the legal fees and related costs associated with a project financing can be very high. Because the risks assumed by lenders may be greater in a non-recourse project financing than in a more traditional financing, the cost of capital may be greater than with a traditional financing.Chapter 2 2.1 Project Finance Participants And Agreements| 1.| Sponsor/Developer. The sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project. If there is more than one...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Fin 535 paper
  • The impact of interest based banking on Socio-Economic Enviroment and Its solution through Islamic Finance Concept Essay
  • Essay on An Overview of Project Finance and Infrastructure Finance 2009 Update
  • Essay on Finance 605 mini projects
  • Finance and Debt Essay
  • Accounting Finance Research Essay
  • Week One Managerial Finance Research Paper
  • Essay about Depreciation and Corporate Finance Exercise

Become a StudyMode Member

Sign Up - It's Free