project finance training

project finance training

Enhancing Understanding and Proficiency in Project Finance: A Comprehensive Training Guide

1. Introduction to Project Finance

The world speaks in foreign languages. The international language of finance is project finance. Project finance creates value by providing financial support to develop physical assets, thereby creating added value. The structure of project finance is put together in such a way as to facilitate the sell-out of the project sponsor’s liability after the project has been structured, built, and is operational. The result is that if a sponsored project goes perfectly, the final event is the sell-out of the project liability to the final investor after the project has been structured, built, and is operational. If a project result is the bet without risk, high naturally leveraged rates of return. If a project fails in making the first-year minimum debts, the project is sick and the equity owner is required to make a sponsor contribution. Simply stated, if project finance is successful, the equity is rewarded. If the outcome is not favorable, the equity sponsor is required to contribute.

This is a unique how-to book that will facilitate increased understanding in the generally arcane practice of a popular structured finance technique: project finance. This book consists of eight well-researched chapters and provides practical training on commercial, financial, and legal aspects of project finance, making it a veritable practical handbook. This book provides a blueprint to interested parties to have successful project finance execution and administration. This book is especially valuable to practitioners, consultants, proposed sponsors, and government officials. How to develop a water-tight project finance structure from a commercial, legal, credit, and process prospects. The various project finance players and what their goals, objectives, strategies, action plans, and deliverables are. Techniques of successful project finance administration and close-out. Also covered here are how to manage fraud and near-sickness situations detailing symptoms and cures.

2. Key Concepts and Principles in Project Finance

The “rules” and principles of project finance are not essentially different from the “normal” ones of finance but they operate in a “special” environment with different characteristics that require a specific treatment for proper management. The principles of project financing remain the same, but there are important and special considerations such as the non-recourse clause, evaluation of the projected cash flows keeping in view the high level of leverage involved, the evaluation of residual values, the role of public authorities, and the effect of an eventual position on moral hazard, marketability of the goods and services provided by the company, contracts, terms, and statements of the relevant risks involved. Because of these factors, in practice, project financing is a highly-structured operation involving the activity of different kinds of finance and consulting operators.

Project financing is generally defined as an arrangement under which investors or financial institutions deliver funds to a project company in return for an agreed-upon repayment during the life of the project. The security for the lenders consists mainly of the rights and revenues associated with the project (viz. the rights to take recourse to the project’s assets – refinancing/modifying them as may be possible – revenues, and commercial contracts). An exhaustive study, analysis, and understanding of these relationships, revenue streams, and the accompanying documentation of the relevant basis for project financing.

3. Structuring and Financing Project Deals

Project finance transactions lend themselves to the development of a shared financing system because of the special nature of the risk and the fact that different groups can participate in the way best suited to their needs. The desired shared funding approach for specific interest groups of project finance deals is not directed to the interests of other parties, but to the conditions that the funds should carry. All those participants whose funds will bear a reduced burden of the project can expect commercial returns in accordance with the risks of the project and will see that risks are carefully managed. The project representative must represent the interests of its group and make sure that the conditions of participation are fair. Proper structuring and negotiation are key considerations of the project financing analyst, who wishes to avoid punitive treatment of the sponsor and the associated increase in the project cost.

In a project finance deal, the developer creates a special purpose entity (SPE) to manage the project, devoted exclusively to its construction, the financial closing, and the transfer of the project to the end-user, without the SPE incurring other risks. The risks of opening, building, and initiating the operation of the project are so severe that market conditions would make it practically impossible to get the combinations of finance provided by various groups that the SPE needs to financially close the opening, making it stick to the decision of constructing the project, opening it for operation, delivering it to the end-user, and repaying all financial resources used in the clear project is as small as possible. The financing of a project is not the responsibility of a single group, which typically finances much less than 100% of the project cost, but is distributed among a number of participants, each with different needs and objectives in the form of structuring its share of the project’s funding package.

4. Risk Management in Project Finance

Often much-hyped PFI/PPP deals in the UK in the last decade lead to unsatisfactory delivery of output (nobody seems yet to acknowledge a passable MSW or railway services provided) to students or tools for the sponsor. Since most supporters have drunk the Kool-Aid ration served to us by financial economists and advisors, the reaction of financially dyspeptic users to unacceptable delivery is not surprising. When one considers the utilities, airports, and even roads projects, stakeholders are getting increasingly nervous as we struggle to understand why there is not enough supply of equity in the market. At the retail level, spreads on the long-term debt of the infrastructure corporates hover about 350 basis points. What are these corporate investors in international utility companies worrying about? After all, they have professional management backed by clear liabilities (concessions contracts) and talented engineers to guarantee revenue streams subject to high barriers to entry.

Project finance occupies the intersection of infrastructure projects and corporate finance. Like infrastructure projects, success in project finance involves not only the successful completion of a revenue-yielding establishment but also the design and operation of that establishment to a measurable set of standards for the benefit of a competitive set of customers. The valid complaint that more than 40% of projects fall short of expectations makes a noise loud enough for skepticism about the ability of project sponsors to predict the achievement of project plan success in the project. The fear of uncertainty has led corporate finance people to model returns in the improbable positive and negative tail events, resulting in the estimation of a “risk-adjusted” competitive return that enables sponsors to find the optimal mix of equity and debt to enable the project to raise sufficient funds. The estimates of risk and return establish the funding model that reduces uncertainty.

5. Case Studies and Practical Applications

Here we can emphasize actions that will demonstrate to current and potential supporters that the right performance will be achieved. On the other hand, the additional lender explains how the collateral management system is of paramount cornerstone in a new development with a particular correlation to work short-term operation schedule. The board of the project should not be dominated by representatives with a short-term horizon, looking for short-term profits. In the short term, the sponsor management should be in position to negotiate a performance contract with the compound. At the end of the project, the compound and its stall will benefit from strategic revenues. No possibility of optimized renegotiation linked to regulations or specific administrative or commercial support by Union for the National Electricity System (publicly listed company controlling Snam), an Ital-Power company and the lead seller in the transaction act. As can be seen on the following explanation for the schedule, the project must keep a significant hold on the market and commercial incentives to perform all management tasks and responsibilities at an agreed performance standard. Consequently, the sponsor has to invest in a real skill organization responsible for plant ownership and plant operation, and at the same time, the investor-to-efficiency (lack of collaboration would jeopardize the project).

The objective of this case is to evaluate the material available to the sponsor of the project. As a project will also be a new experience for the sponsor and the majority of its team, they all need to be able to monitor much attentively the development of the project through the planning phase. In fact, no new skills are developed during the construction phase, and a very large proportion of the cost overruns or time extensions for the delay relate to the lack of skills on the team in charge of the development of the project. The sponsor must also initiate the collateral management system as soon as possible. If a major player backs the sponsor, this collateral manager is of permanent value and the external supporters can rely on this performance and borrow on favorable conditions. At the end of the successful completion of the project, no extra equity has to be paid back. With growing pressures on potential bank lenders, the potential Falzarinian crisis associated with the reallocation of the debts providers income, the sponsor must demonstrate a high standard of control or the implementation of a leverage policy. The best performer is certainly white.

The provision of electricity through the development of energy projects under a long-term power purchase agreement (PPA) is one of the most closely observed and exciting initiatives in emerging countries. Independent power producers continue to be active and have developed expertise in negotiating agreements that are most often on a standard template. These transactions have been so publicized that there is a feeling that energy is the only sector that could benefit from the know-how of international investors. Nothing could be further from the truth. In fact, it often seems that emerging markets are limited to projects that they can sponsor through counter-guarantees from developed countries or international organizations or that can capitalize on some natural endowment for which in order to extract rents or undertake natural resources transformation there will be willing developed nations. The opposite is the case: infrastructure in emerging markets covers a very broad spectrum, and structural transformation is characterized by the diminishing share of the energy sector in the newly created wealth and the increasing capacity of power transmission and power delivery.