FNCE90048 Project Finance Lec2 2021s1

FNCE90048 Project Finance
Lecture 2
Project Costs
Sources of Project Finance Funds
Lecturer – Tony Cusack

March 2021
Lecture 2 topics
• Review Lecture 1 questions

• Part 1 – project costs
• Part 2 – traditional sources of project funds
• Equity investment
• Debt funding
• Part 3 – alternative sources of project funds
• Export Credit Agencies / Multilateral Agencies
March 2021 FNCE90048 Lecture 2 2

Lecture 1 questions
1. What are the key features of project finance that distinguishes it from
other forms of financing?
2. Why would businesses consider the use of project finance in a
proposed project? What are the alternatives?
3. Would a listed company’s share price go up, down, or stay the same if it
announces it will use project finance for a proposed new project?
4. Who are the main parties to a project financing?
5. What is the main rationale for using project finance, in the case of (i)
Sponsors, (ii) Lenders, and (iii) Governments?
Lecture 2 – Part 1
• Project costs
– commencing a new project
– project investment costs (CAPEX)
– funded project structure

Re-cap: activities in project stages
Project stage Project Activity Financing Activity
Pre- Project identification Project identification
construction Cash flow predictions Cash flow predictions
Risk identification and minimising Risk identification and minimising
Technical and financial feasibility Technical and financial feasibility
Construction Design operating facility / equipment Equity arrangement
Engage EPC contractor(s) to construct Debt negotiation and syndication
Sign offtake contract Commitments, security,
Meet completion tests documentation, disbursement
Operations Commence operations Financial closure

Continuous operations monitoring Monitoring operations and covenants
Project reporting / compliance Debt repayments

Commencing a new project
• so, the starting point is to identify a project – how?

• once it has been decided that an identified new project warrants further
investigation, the sponsors will prepare documentation relating to the project
to enable cash flow estimation and risk allocation
– e.g. description of the type of project, proposed location, required plant
and equipment, market expectations, etc.
• at this early point, two important financial matters are addressed:
1. the cost of project, and
2. the proposed means of financing these costs

Example – oil production project

How Was Oil Formed?
(croftsystems.net)

Commencing a new project
• the example demonstrates the scale and complexity of the type of projects that
are project financed
• each of the elements will be subject to discussion, further research, amendment
and agreement – a process that takes many months and is continually updating
• the next step is to estimate costs of construction, such as design, building,
management, materials, equipment, labour, etc.
• in basic terms, the total amount of these costs is the amount that needs to be
raised (via equity and debt)
• recall that total project cost relates to the construction period, i.e. the cost to
construct an ‘asset’ (CAPEX); then, operations enable repayment of debt
Where financing fits in

Project costs
• project costs are those expenditures incurred in relation to the design,

implementation and construction of the project, such as:
– up-front outlays, e.g. land acquisition and clearing, initial engineering and design
– construction costs, e.g. building materials for structures
– specialised equipment required for the projects operations
– other fixed assets such as necessary infrastructure (e.g. pipelines)
– costs of operating / managing the SPV during construction
– financing costs (mainly interest, but also service fees, guarantees or other credit
support mechanisms) are typically in this category
• note that when estimating total project costs, only focus on cash outlays
Past exam question
• You are about to commence work as a financial adviser on a wind power

generation project and have been told that the total project cost will be $1.5
billion. Identify and explain six major project costs that you would expect to
find included in the $1.5 billion total (note: there is no need to estimate the
amount of each cost you suggest)
• how do you get full marks?

• note, this is the same as “how do you demonstrate to your client that you are
a competent consultant?”
• good news, it’s not complex – i.e. on what must they be spending the $1.5b?

Example – project costs
TOTALS
PROJECT CAPITAL EXPENSES First Phase Second Phase
$m $m
Preparatory Works 15.00

Subsurface Work 4.50 22.85
Special Studies (Flow Assurance, etc.) 7.43 7.43
Drilling & Completion Activities 55.58 107.48
Surface Facilities Activities (including Pipelines) 308.70 40.18
Insurances & Certification 10.00 5.00
Project Management Costs (excl opex) 45.00 25.00
Field Optimisation Works 1.50 4.00
TOTAL (Million USD) $447.71 $211.95

Non-cash project costs
• in addition to the cost categories outlined earlier, there are other ‘costs’
associated with capital projects, such as:
– environmental costs (e.g. pollution, deforestation, land degradation,
greenhouse gas emissions, loss of biodiversity, etc.)
– social costs (e.g. re-location, adverse health impacts)
– economic costs (e.g. lower productivity than in the home country, say due
to more stringent safety procedures)
• whilst any of these can have a detrimental effect, they are not cash costs and
therefore, are not to be included in the project budget

Non-cash project costs
• to reiterate, total budgeted project costs will include only cash costs related
to the construction stage, i.e. only the costs of constructing the assets
– as noted, all related (e.g. management) costs are included, too
• potential non-cash costs of the project need to be recognised as risks, which
will be subject to mitigation (next lectures)
• e.g. think of the costs of an environmental clean-up due to an oil spill in
operations – do we budget $tens of millions for this?
• of course not, because: (1) we don’t plan to destroy the environment; and (2)
such event is a risk at planning stage, so we should be mitigating it

Past exam question re-visited
• You are about to commence work as a financial adviser on a wind power

generation project and have been told that the total project cost will be $1.5
billion. Identify and explain six major project costs that you would expect to
find included in the $1.5 billion total (note: there is no need to estimate the
amount of each cost you suggest)
• it’s as easy as it seems, but it’s NOT as easy as copying directly from the slides
providing a list of common capital costs
• your answer is inadequate if it: doesn’t address wind power; only lists costs
without explaining; includes non-cash costs, such as environmental or social;
has more or less than six; or relies on $ cost estimates to answer

Estimation of project costs
Cost estimates may be derived through the following steps:

• Identify cost categories: the construction scenario is broken down into cost
categories relating to different elements
• Gather cost data: unit costs must be assessed for each of the cost category
identified; a unit cost list can be drawn from various data sources (market
survey, statistical collection, etc.) or from direct consultation with providers;
cost studies conducted for similar projects can also be used
• Adjust costs to local conditions: where applicable, cost data must be adjusted
to take into account local conditions, including timing (costs estimated in past
years must be escalated to account for inflation), local market conditions, etc.
Construction costs = total funds raised
• the total amount of forecast construction costs – including all core facilities,
equipment, infrastructure, management, etc. – is the amount that the SPV
needs to be raised by the sum of equity and debt
• e.g. assume the Oil Production project (above) is estimated to cost a total of
$1b, i.e. for everything paid to get to the complete structure
• sponsors would need to address how much will be equity and how much debt
– will often try to minimise equity, but this might not always be possible
• this emphasises the importance of getting the cost estimates correct, so
detailed work needs to be done on the project costings
– e.g. what happens if the project ends up costing $1.2b?
Funding and operating structure
Lenders
Loan Debt
EPC, funds repayment Offtake
design, etc. SPV (entity that owns contract(s)
the assets comprising
Contractors the project; estimated Purchasers
total cost = $1b)
Equipment, Output
building
Equity Returns to
materials,
funds investors
labour, etc.
Sponsors

– Equity investment
– Debt funding

Sources of project finance funds
• project finance funding categories are the same as for any business, i.e. they
are comprised of equity and debt
• equity includes:
– sponsors’ own funds (usually cash)
– non-sponsor equity investment (e.g. IPOs, placements, etc.)
• debt includes:
– loans from financial institutions, typically bank syndicates
– loans from other debt providers
– issue of debt securities (e.g. bonds, also call public debt)
• theoretically, hybrid instruments might also be used, but are not common
Equity finance
• often, the initial capital contribution to a project will be an equity subscription

by the sponsors, typically in the form of cash
– in some cases, there are in specie contributions of equipment or services
• in many cases, the sponsor equity to be contributed will be determined by the
level of debt that the project can bear
– this will often be indicated by the cash flow forecasts in the project finance model
(we will see this in detail in a later lecture)
• in addition to sponsor equity, some projects raise equity funds by way of:
– private equity / placements, usually with associates
– IPOs, where the SPV will become a listed entity, raising equity from the public

Equity risk of projects
• in any business activity, equity investors typically bear core business and
financial risks – that is how a return is earned
• but in project finance, sponsors of a project are often contingently liable for
additional obligations in the event that cost overruns occur or the project fails
(i.e. construction failure triggers full debt repayment)
• also, projects require a long construction period, so equity investors
understand that they will have delayed dividends
– usually, a project is prevented from paying dividends before operations commence
• in addition, lenders often restrict the payment of dividends during the early
years of operation, until the debt has been substantially repaid
Equity finance
• the foregoing suggests that equity in a project financing is more risky than
normal equity investments
• this is true on one level, but recall that these projects are relatively low risk
operations
• in addition, as we have seen, sponsors typically set up a project to ensure that
they will directly benefit from its construction and/or operation, such as:
– undertaking construction activities and/or operations once completed
– suppliers of essential products and services to the project, including engineering
– purchasers of the project’s output
– owners of rights to any natural resource reserves the project will utilise

Project finance debt
• as we know, a distinguishing feature of project financing is the use of

significant debt to fund development of the project
• the issues that an SPV must address in this regard include:
– how much debt to seek (often determines equity amount)
– the type of debt to seek (e.g. bank loans v. bonds v. other)
– the availability of project finance debt
– cost of alternative debt types
• we find that there are a number of potential providers of debt finance to a
project and an SPV must identify and evaluate all available sources

Project finance debt sources
• commercial banks / syndicates have played an active role in project finance

since the 1930’s, and now there is an extensive market for long-term debt
financing of projects in world capital markets
• these bank lenders typically provide long-term financing at floating, or
variable, interest rates (expressed as a margin over some specified benchmark,
such as prime rate, U.S. Treasury Bonds, or one of the LIBOR rates)
• public debt markets (bonds) can provide funding at fixed interest rates
• non-financial institutions can also provide funding in limited circumstances
• each of these debt providers has differing characteristics, which makes them
more / less suitable for the borrower, depending upon the specific project
Specific types of bank funding
• many commercial banks have developed an ability to evaluate complex

project credit risks and have a willingness to bear repayment deferral (i.e.
until operations), which other lenders usually shy away from
• in that sense, project finance is a specialised lending category, but the lending
products are traditional; in general, four broad alternative types of bank loan
facilities may be arranged to finance a project:
1. Revolving credit
2. Term loan
3. Bank guarantees, e.g. letter of credit
4. Bridge loan
Revolving credit
• commercial banks often provide initial construction financing in the form of a

revolving credit facility or similar
• under such facility, the project company can draw down on the facility as
funds are needed, subject to a maximum funds availability
• akin to an overdraft facility in corporate finance
– cost / pricing implications?
• a revolving credit facility is more suited to short-term needs, such as working
capital or pre-construction costs
– it is generally too costly for long-term financing

Term loans
• this category is the main one in relation to bank debt financing and will
typically comprise the majority of debt funds, i.e. the senior debt
• these loans are advanced in instalments over the construction period, then
the total owed at the end of construction (principal plus interest) is the
permanent loan, that is subject to an amortisation (repayment) schedule
• this is the practical outcome of the arrangement whereby after completion,
the project financing moves from limited recourse (i.e. construction loan) to
non-recourse (permanent financing)
• typically, the commitment for construction financing will be for about 2-4
years and for permanent financing from 6-15 years
Term loans
• term loans typically have the following features:

– floating or variable interest rate
– relatively short-term, i.e. often less than half of the forecast project life
– loan agreements are extensive and typically contain tight covenant
restrictions on the borrower (SPV)
• we will see that other sources of finance have some more favourable
features, but the main advantage of loans from bank syndicates is that once
the lead manager approves the loan, the project can commence in the
knowledge that debt financing will be available

Term loan amortisation example
• assume a 4-year construction that is financed $200m equity and $800m bank debt
• the loan will be advanced in instalments, under a schedule that is agreed between
the parties up-front (i.e. at beginning of construction)
• over 4 years, there will be an average of $200m p.a., or $50m quarterly
• after the 1st quarter, the outstanding principal will be $50m; after the 2nd quarter, it
will be $100m + interest for 3 months on the first $50m, and so on
• so, in the last quarter of construction, the final $50m will be drawn by the SPV and
the amount owing will be $800m + interest on all previous drawdowns
• let’s assume that total interest accrued is $100m; adding $800m principal, $900m is
the balance owed at the beginning of operations, and is the amount to be repaid in
agreed instalments from operational cash flows over the permanent loan period
Term loan amortisation example
• assume the parties have agree that the loan is to be repaid monthly in arrears
over 14 years, and the interest rate is LIBOR + 1.5% (what is this margin?)
• if LIBOR is currently 2.35%, what is the initial monthly repayment?
• this is an ordinary annuity calculation, so use: PV = A[(1 - (1+r)-n))/r]
• re-arranging and substituting known variables gives us:
– A = $900m / [(1 - (1+ 0.0385/12)-(14x12))/(0.0385/12)]
– so, required monthly repayment (A) = $6,938,351
– what happens if LIBOR changes?
• note: not all loans are negotiated as repayable in equal periodic instalments

Bank syndicate (term) loans
• the usual approach to negotiating a project finance (term) loan is to appoint

one or more banks as lead manager(s), who will negotiate terms, underwrite
the debt and organise syndication of the loan
• sponsors need to carefully consider when the lead managers should be
brought into the transaction
– the objective is to ensure maximum competition between potential
lenders to ensure favourable financing terms
– if there is only one lending group, they have a great advantage (what is it?)
– if possible, several banks should be invited to bid in a competition or
tender to act as lead manager and underwriter
Bank syndicate (term) loans
• once a lead manager has been selected, there will be negotiation of

engagement terms and then the formal application for project finance debt is
made, at which time the lead manager will initiate a due diligence process
• when (if) the decision to lend is made, a mandate letter is normally signed
between the SPV and lead manager(s), which expresses the banks’ intention
to provide the agreed amount of debt
• this letter is a binding commitment (on the lead manager), but will be subject
to due diligence, credit clearance, and agreement on detailed terms
• importantly, this letter provides the SPV with comfort that the money will be
there for the project to proceed
Standby letter of credit
• a letter of credit (LC) doesn’t involve provision of debt funds by the bank
• rather, it’s a guarantee of payment issued by a bank on behalf of a client (e.g.
SPV) that is used to support a proposed transaction with a third party
• the use of LCs has become a very important aspect of international trade (e.g.
import of equipment), due to the nature of international dealings
– e.g. difficulties relating to factors such as distance, differing laws in each
country, and difficulty in knowing each party personally
• if the buyer was to default on a payment, then under the terms of the LC, the
bank would make payment
• note that LC’s are expensive, costing 1-8% of amount financed
How does an LC work?

How does an LC work?

Bridge loan
• a bridge loan is commonly used to cover short-term cash shortages, e.g. to

cover any gap between the timing of expenditures and the scheduled
drawdowns of long-term funds (say, from the term loan)
– e.g. if next drawdown is in 2 months, but money has run out
• bridge loans are typically supported by firm takeout commitments from long-
term lenders or equity investors
• accordingly, the cost of funds provided by a bridge loan reflects the risk that
bridge loan providers must bear, which in turn reflects the credit standing of
the long-term lenders or equity investors who provide the takeout
commitments
Comprehensive credit facility
• as an alternative to negotiating separate loan commitments in each category,

lending bank syndicates often propose to arrange a comprehensive credit
facility covering all of a project’s loan requirements
• this typically involves a revolving credit facility during the construction period,
some or all of which converts to a term loan upon completion (usually with
interest capitalised)
• the revolving credit facility may also allow a portion of its availability to be
used as a standby letter of credit facility
• a comprehensive credit facility can often provide greater financial flexibility
both to the lender and to the project
Example: ConnectEast project
• ConnectEast is original name of the owner of EastLink, the 39km toll-road

located in the eastern suburbs of Melbourne
• construction began in July 2005 and the road opened on 29 June 2008
• the project was a public private partnership (PPP) and the first tollway
commissioned under the Partnerships Victoria (2001) policy framework
– winning bidders: Thiess Contractors and John Holland Group
– it was Australia’s largest PPP project, involving a 49-month construction
period and total project cost estimated at AUD3,795 million
• ConnectEast was listed on the ASX in November 2004 before any significant
construction activity had even commenced
ConnectEast project structure & finance
• the ConnectEast listed ‘entity’ comprised two principal unit trusts, a common
management company and a stapled security arrangement
• AUD1,120m ($1.12b) of equity raised on the ASX was supplemented by a
further $290m in ‘deferred stakeholder equity’ and $297m to be raised via a
dividend reinvestment plan
• the SPV initially borrowed a total of up to $2.86b in three senior facilities
– an equity bridge (to cover deferred equity component) of $290m
– a construction loan of $2,088m (interest was capitalised during construction,
converting to a medium term investment loan when construction is completed)
– a bond facility

ConnectEast project funding
SOURCES A$ million
2,088
Senior bank debt
1,120
Equity raised via offer
297
Equity raised via DRP
290
Deferred equity tranche
TOTAL
3,795 note: the transaction was
structured to enable the SPV to
APPLICATIONS provide investors with
Construction costs 2,502
distributions during the
Equity coupons during construction 315
Net interest during construction 239 construction period
Upfront development & finance costs 225
Ongoing development & finance costs 219
Distribution reserve 44
Contingency reserve 25
Interest rate reserve 32
Ramp up reserve 99
Debt service reserve 85
Operations reserve 10
TOTAL 3,795

Fixed rate debt
• historically, corporations and (non project finance) infrastructure projects have

been able to obtain fixed rate funding by issuing bonds to investors such as life
insurance companies and pension funds, but neither funded project finance
• the private placement market has been a little more receptive to project
financing, but this too has been a only limited source of project finance debt
• public securities (bond) markets were traditionally only available to projects
after they had completed at least a few years of profitable operations
• however, the availability of bonds for project debt began to increase in the
early 1990s, when the rating agencies became more sophisticated (and more
willing to be involved) in credit analysis of project financing
Pros and cons of financing with bonds
• Pros • Cons
– fixed rates (coupons) – bond markets are cyclical, so funds can
– lower pricing than bank loans become unavailable with little / no
– longer terms to maturity notice, meaning there is a greater risk of
not obtaining required debt
– tapping extensive debt sources as
there are many more potential bond – lump sum drawdown creates ‘negative
investors than just banks (but note carry’ on cash (interest spread)
credit rating is usually required) – costs fees to get / maintain credit ratings
– the ratings process brings some – extensive disclosure of proprietary
measure of political protection and information for credit rating
risk mitigation, as the ratings agency – it’s generally not easy to prepay and
will explicitly evaluate such risks refinance bonds
Bank syndicate funding dominates
• overall, despite the number and variety of potential lenders, for the majority
of project financings, debt will (at least initially) be provided as a term loan by
commercial banks / syndicates, for three main reasons:
1. the size and term of the capital required to ensure availability and
commitment of sufficient funds to complete the project;
2. the degree of sophistication needed to understand the complex
arrangements typically involved in a project financing; and
3. the difficulties and time delays involved in registering public debt securities
with government authorities and/or the need to obtain a credit rating to
ensure marketability to the purchasers of public debt securities (bonds)
Refinancing
• we find that sometimes (often?) the permanent loans are repaid early – soon
after completion – under a refinancing arrangement
• refinancing is the replacement or renegotiation of the permanent loan of the
project company on more favourable terms
– renegotiation is possible if the lender wishes to retain the loan
– alternatively, at start-up of operations it might be agreed by the parties
that the balance of the permanent loan is paid out (replaced) by funds
from either a single bank or by the issue of bonds
• these options become possible due to the change in risk profile, i.e. the
change from construction period risks to operations risk
Refinancing
• refinancing is attractive to a project entity as it can provide a number of

advantages, including:
– a reduction in the debt pricing (i.e. lower interest rate) – the main benefit
– extension of the debt term, giving better debt maturity profile to match asset life
– an increase in the gearing (i.e. the amount of debt to equity)
• this is possible when lenders are prepared to relinquish some of their contractual
protection on the basis that the perceived (and real) project risks are reduced
– lighter debt and interest reserve account requirements
– removal of negative covenants / debt ratios
– the release of guarantees provided by the shareholders of the project company or
sponsors or by third parties

Refinancing example – ConnectEast
• ConnectEast took advantage of refinancing, which was arranged prior to

completion, to cut in once the project (construction) had completed
• a total of $2.096b refinancing was completed, entirely in the bank debt
market, with funding out to 10 years
– it resulted in significant savings in interest costs, in the range of ~0.5%
– also provided longer term financing, consistent with the cash flow patterns
of the project
• it is important to note that refinancing does not change the amount that is
owed, but typically results in a saving of interest

Financial advisory role
• in addition to provision of project finance debt led by lead manager(s),

bankers / financiers often also provide project structure advice, i.e. filling the
role of financial adviser
– ideally, the lender and advisers are not the same bank(s)
• a financial adviser in project finance has a broader role than would be the
case in general corporate finance
– i.e. the elements of the project must meet project finance requirements, so in
advising on structuring the project, the financial adviser must anticipate all the
issues that might arise during the lenders’ due diligence process, ensuring that
they are addressed in the project plan, contracts or elsewhere

Financial advisory role
• the financial adviser’s scope of work can include:

– advising on the optimum financial structure for the project
– assisting in the preparation of a financial plan
– advising on sources of debt and likely financing terms
– assisting in preparing a financial model for the project
– negotiating project contracts and advising on their financing implications
– preparing information memoranda to present the project to financial markets
– advising on assessing proposals for financing
– advising on selection of commercial bank lenders or placement of bonds
– assisting in negotiation of financing documentation

• Equity investment
• Debt funding
• Part 3 – alternative sources of project funds
• Export Credit Agencies / Multilateral Agencies

Alternative funds providers
• the final category is funding from other potential providers of support

• depending upon the circumstances, cross-border projects may be eligible to
receive some financing support from (1) government bodies, or (2)non-
government supranational agencies
• in project finance, the main player in the ‘government support’ category is
export credit agencies (ECAs)
– all major developed nations have established one or more ECAs to
administer export credit programs (see OECD list)
• in the latter category (2) are multilateral agencies (MLAs), such as the World
Bank and other international development bodies
Export Credit Agencies (ECAs)
• ECAs exist to promote and assist with the export of equipment manufactured
within a home country, and in recent years they have been willing to be
involved in project financing for this purpose
• they were originally established to help domestic companies export to
international markets, essentially to reduce exporters’ risk of not getting paid
when sending goods overseas
• for ECAs to participate in a project financing, there must be a link to the
export of equipment to the project located in another country
– e.g. this means that if there is a direct loan from an ECA, these loan funds
must be used (only) to purchase exported equipment
ECAs and project finance
• in these circumstances, SPVs can approach an ECA to provide a loan (on

favourable terms – why?) to finance purchase of equipment to be exported to
the project from the home country of a sponsor
• in this sense, ECA funding can be used to replace a shortfall of bank lending
(hence ‘co-financing’) since there will be less bank debt required
– a practical issue for some projects, e.g. where country risk is high (why?)
• in addition to financing, ECAs also provide other related services, such as loan
guarantees, political or credit risk insurance, and similar
• ECAs active in project financing include: Eximbank and DFC, USA; UKEF, UK;
EDC, Canada; EFIC, Australia; MITI, Japan; COFACE, France; SACE, Italy
ECA’s and their role in Project Finance
Source: https://www.tradefinanceglobal.com/export-finance/export-credit-agencies-eca (2018)

Multilateral Agencies
• multilateral agencies (MLAs) are aid agencies that provide regional and
international development aid or assistance, divided between national
(mainly OECD countries) and international organisations
– bilateral agencies are a variation (two parties)
– they are also known as Development Finance Institutions (DFIs)
• their mandates vary, but broadly speaking, MLAs provide support for
development programs in developing nations
• in recent years, they have played an increasing role in project financing, since
many of the projects are large scale developments in developing nations

Multilateral Agencies
• the MLAs most relevant to project finance are those that operate as banks
• these are a sub-set of MLAs collectively known as Multilateral Development
Banks (MDBs), the most important of which include:
– World Bank
– Asian Development Bank (ADB)
– International Finance Corp (IFC)
– Multilateral Investment Guarantee Agency (MIGA)
• although MDBs operate as banks, their services are more broad than just the
provision of loans and guarantees

Services of selected MDBs

How to improve the financing outcome
• strategies to improve the financing outcome (maximum amount, best rate):

– choice of compatible partners (sponsors and lenders)
– ‘warm-up’ of potential lenders
– pre-qualify potential lead arrangers
– select an experienced financial advisor
– allow lenders sufficient evaluation time
– ensure project is at the lower end of the industry cost curve *
– obtain government or non-government assistance, where available
• however, strong project fundamentals (profitability, robustness, execution) will
always be the key consideration
Lecture summary
• the costs of a project refer to the outlays required to get to the point where
there is an operational asset (in practice, a group of interrelated assets)
• it is the cash cost of constructing, funded by equity and project debt
• project finance technically refers to the debt borrowed by the SPV, added to
sponsors’ equity, to fund the full project costs
• project debt can comprise short- and long-term borrowing, fixed or variable
rate interest, and negotiated repayment terms
• there are many possible lenders to projects, but the market is dominated by
variable rate interest term loans provided by bank syndicates
– loans from MLAs and ECAs might be available in some cases
Lecture 2 questions
1. Identify some of the main costs of a large-scale project. How are they estimated?
2. Why are some items on slide 19 shown in red?
3. Discuss the different forms of equity capital that can be used in project financing.
Identify circumstances to which these different forms of equity would be suited.
4. Identify and describe the different forms of debt available for project financing.
5. What is a Letter of Credit facility? In what circumstances would it be used in project
financing? What are its advantages and disadvantages?
6. Discuss the pros and cons of up-front project financing with bonds as opposed to
bank syndicate borrowing.
7. Describe ECAs and MLAs and discuss their roles in project financing.
8. How might an SPV maximise the debt financing outcome?

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FNCE90048 Project Finance

Lecturer – Tony Cusack

• Review Lecture 1 questions

March 2021 FNCE90048 Lecture 2 2

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Operations Commence operations Financial closure

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• so, the starting point is to identify a project – how?

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• project costs are those expenditures incurred in relation to the design,

• You are about to commence work as a financial adviser on a wind power

• how do you get full marks?

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Preparatory Works 15.00

TOTAL (Million USD) $447.71 $211.95

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• You are about to commence work as a financial adviser on a wind power

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Cost estimates may be derived through the following steps:

• Part 1 – project costs

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• often, the initial capital contribution to a project will be an equity subscription

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• as we know, a distinguishing feature of project financing is the use of

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• commercial banks / syndicates have played an active role in project finance

• many commercial banks have developed an ability to evaluate complex

• commercial banks often provide initial construction financing in the form of a

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• term loans typically have the following features:

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• the usual approach to negotiating a project finance (term) loan is to appoint

• once a lead manager has been selected, there will be negotiation of

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• a bridge loan is commonly used to cover short-term cash shortages, e.g. to

• as an alternative to negotiating separate loan commitments in each category,

• ConnectEast is original name of the owner of EastLink, the 39km toll-road

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• historically, corporations and (non project finance) infrastructure projects have

• refinancing is attractive to a project entity as it can provide a number of

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• ConnectEast took advantage of refinancing, which was arranged prior to

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• in addition to provision of project finance debt led by lead manager(s),

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• the financial adviser’s scope of work can include:

• Part 1 – project costs

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• the final category is funding from other potential providers of support

• in these circumstances, SPVs can approach an ECA to provide a loan (on