VCE Internships- Smart Task 01

Project-Project Finance Analysis and Modeling

Abhishek Rawat
ABVSME-JNU
Qns-01-What is Finance? How Finance is different from Accounting? What are
the important basic points that should be learned to pursue a career in
finance?
Solution- Finance is the study of managing money which included the activities
associated to acquiring and spending of the funds such as investing, lending,
borrowing, budgeting, saving, and forecasting. There are mainly three types of
finance
1)-Personal Finance - defined as planning involved with the management of
individual or household funds/money
2)-Corporate Finance -defined as managing assets, liabilities, revenues, and
debts for a business.
3)-Public Finance- included tax systems, government expenditures, budget
procedures, and other government concerns.
Finance is the study of effectively managing money with some defined goals
whereas accounting is generally a book keeping process of recording and
reporting finance related transaction.
Important basic point one should be learned to pursue a career in finance
Should have a number crunching ability.
Should have the knowledge of basics micro and macro Economics.
Should always asses the risk associated with any investment.
Learn the work-Life balance.
Learn the ethical way of managing funds.
Learn basic mathematics and computer tools which included excel.
Qns-2 What is project finance? How project finance is different than corporate
finance? Why can’t we put project finance under corporate finance?
Project finance is the funding (financing) of long-term infrastructure, industrial
projects, and public services using a non-recourse or limited recourse financial
structure.
Project finance is many ways different from corporate finance. Project finance
deals with the financing of long-term infrastructure, industrial project and public
service project which is usually done by non-recourse financial structure so that
companies can fund major projects off-balance sheets. In this funding, a special
purpose vehicle (SPV) is formed for financing long term projects.
In Project Financing, multiple participants are allowed to handle the project
while the ownership of the project is entitled according to the terms of the loan
only after the project is completed. This financial scheme offers better credit
margin to lenders while shifting some of the risk from the sponsors to the
lenders.
Corporate finance defined as managing assets, liabilities, revenues, and debts
for a business entity that has a specific purpose that is maximizing shareholder
equity. Corporate finance is a much more complex financing type which
generally look into various expect of the business which includes capital
financing, capital investment, managing cash flows and making a decision based
on these records.
We can’t put project finance under corporate finance because project finance is
much more of funding process in isolation in which a finance of long-term
project is done by off-balance sheet-method whereas in corporate finance it is
more of a type of finance in which you have to consider various economics,
political and market development to take your decisions based on them

Qns-3 Define 20 terminology related to project finance.

Off-Balance sheet (OBS)- Off-balance sheet (OBS) items is a term for assets or
liabilities that do not appear on a company's balance sheet.
Special Purpose Vehicle (SPV)- special purpose vehicle is a subsidiary created by
a parent company to isolate financial risk.
Non-Recourse Financing- Non-recourse debt/loan is a type of loan secured by
collateral, typically real property.
Project Delivery Method- A project delivery method is a system used by an
agency or owner for organizing and financing design, construction, operations,
and maintenance services for a structure or facility by entering into legal
agreements with one or more entities or parties.
Build Operate Transfer- Build–operate–transfer (BOT) is a form of project
financing, wherein a private entity receives a concession from the private or
public sector to finance, design, construct, own, and operate a facility stated in
the concession contract.
Project Finance Mode- A project finance model is a specialized financial model,
the purpose of which is to assess the economic feasibility of the project in
question
Multiple Participants Applicable- As Project Financing often concerns a large-
scale project, it is possible to allocate numerous parties in the project to take
care of its various aspects.
Contractual Framework-A formal agreement between sponsors and lenders
with respect to the financing of the project.
Off take agreement- An off-take agreement is an agreement between the
project company and the offtaker (the party who is buying the product / service
that the project produces / delivers). Supply agreement-
Loan agreement- A loan agreement is made between the project company
(borrower) and the lenders.
Tripartite deed- The financiers will usually require that a direct relationship between
itself and the counterparty to that contract be established which is achieved through the
use of a tripartite deed (sometimes called a consent deed, direct agreement or side
agreement).
Terms Sheet- Agreement between the borrower and the lender for the cost,
provision and repayment of debt.
Better Tax Treatment- If Project Financing is implemented, the project and/or
the sponsors can receive the benefit of better tax treatment.
Risk Allocation-Under this financial plan, some of the risks associated with the
project is shifted towards the lender.

Industrial sponsor - These types of sponsors are usually aligned to an upstream

or downstream business in some way.

Public sponsor - The main motive of these sponsors is public service and are
usually associated with the government or a municipal corporation.

Contractual sponsor - The sponsors who are a key player in the development
and running of plants are Contractual sponsors.

Financial sponsor - These types of sponsors often partake in project finance

initiatives and invest in deals with a sizeable amount of return.
Sponsor Credit Has No Impact on Project: While this long-term financing plan
maximises the leverage of a project, it also ensures that the credit standings of
the sponsor has no negative impact on the project.
Asset Ownership is Decided at the Completion of Project: The Special
Purpose Vehicle is responsible to overview the proceedings of the project while
monitoring the assets related to the project

Qns-4-What are the non-recourse debt/loan? What is mezzanine finance

explain with example?
Solution-Non-recourse debt/loan is a type of loan secured by collateral, typically
real property. In the case of default of the borrower, the issuer of the debt can
seize the collateral and sell the collateral. The issuer cannot seek out the
borrower for any further compensation, even if the collateral does not cover the
full value of the defaulted amount. This is one instance where the borrower
does not have personal liability for the loan.
Mezzanine Finance is a hybrid type of debt and equity in which lender gets the
right to convert to an equity interest in the case of default of the company, after
paying VCs and other senior lenders.
Mezzanine debt has embedded equity instruments attached, often known as
warrants, which increase the value of the subordinated debt and allow greater
flexibility when dealing with bondholders. Mezzanine financing is frequently
associated with acquisitions and buyouts, for which it may be used to prioritize
new owners ahead of existing owners in case of bankruptcy.
For Example, if a financial institute XYZ provides financing of 10 lakh rupees to
company ABC which are into beauty products. Now if the firm wanted to
increase its working capital by getting more debt of 15 lakh from XYZ on
mezzanine financing. In this scenario XYZ can charge higher interest on the debt
capital and also get the right to convert to an equity stake if company defaults.
Qns-5-Explain in details with reasons of what the sectors are or which type of
project suitable fit for project finance?
Solution- Generally those projects who need the financing for long-term or
more expensive are suitable fit for project finance. This is incorporated in a
specially created vehicle (the SPV) whose assets are given as collateral to
creditor as the only source—together with the cash flow generated by the
project—for debt service repayment. These projects are generally are in
infrastructure sector, industrial sector, mining, telecommunication, power
industry and public policy projects.
In these sectors the project are generally very long tenure projects and capital
associate with these projects are very large sums with a high level of risk.
For example, a teleservice provider in a country require large scale
infrastructure, working capital and human resources. Risk associate to this
project is also very large so for this level of project no other financing can help
to raise such large resources so this project is best fit for project finance.
Qns-6-Are you satisfied with your knowledge of basics of Project Finance? If
yes then explain the gist of it?
Solution-Yes, I am satisfied with my knowledge of basics of project finance. In
my understanding project finance is the method of financing large scale project
which needed a huge amount of initial investment. This financing is done by
creating a special purpose vehicle(SPV) which help the firm undertaking the
project to get non-recourse debt so that companies can fund major projects off-
balance sheets. In this funding, a special purpose vehicle (SPV) is formed for
financing long term projects.
In Project Financing, multiple participants are allowed to handle the project
while the ownership of the project is entitled according to the terms of the loan
only after the project is completed. This financial scheme offers better credit
margin to lenders while shifting some of the risk from the sponsors to the
lenders.