KOFFI Raissa

MBA/20/001
Financial Management

Project Finance Assignment

Summary of Chapter 6

There are two sorts of project finance services that may be provided: consulting services and
funding services.

Financial intermediaries such as consulting businesses, auditing firms, free-lance professionals,

and so on provide advice services. It consists of defining a deal's risk profile, timetable, and
magnitude. They assist businesses in a variety of ways, including technical assistance, regulatory
and legislative assistance, risk allocation, money raising approaches, and the development of
business plans. They convert gathered and/or accessible information into numbers in order to
assess the influence of the various variables on the SPV's cash flows, profitability, and equity
structure.

Aside from advice services, there are arranging services, which are provided by commercial
banks and divisions of investment banks from big financial institutions. Obtaining a mandate
from the SPV borrower to form and administer the finance arrangement is what arranging
services entails.

Sometimes the same financial intermediaries can provide both arranging and consulting services.
In reality, it might be advantageous for the SPV since the adviser may offer projects with
excessive risk and, as a consequence, higher returns. Furthermore, because arranging service is
concerned with the legal and financial framework of the project, the mandate will be managed
prudently. The SPV's project will be less expensive since the two responsibilities will be handled
by a single financial intermediary. As a disadvantage, there may be interest conflicts between the
two tasks.

Financing services, on the other hand, are those that are concerned in lending and loan
gratification. Commercial banks are in charge of these services. These banks serve many
functions. They can be: - The arranger's lead manager, manager, and co-manager, who give a
portion of the loan constructed by the arranger. Each category has a different level of
engagement, which distinguishes it.

- Participant banks, which are banks and financial intermediaries that make funds
accessible in accordance with the contractual requirements. They lend a sum less than the
lending commitment's threshold.
- Documentation bank, which is in responsibility of writing the loan documentation as
agreed upon by the borrower and arranger at the time the mandate was assigned.
- An agent bank is responsible of managing the SPV's cash flows and lending throughout
the project's lifespan.

Sponsors of the SPV must pay fees while engaging with advisors and financing providers. As a
result, the Sponsors must pay the following Advisory fees:

- Retainer fee: which is a charge for using analyst time to analyze the feasibility of the deal
and maintain communication with parties that were initially involved in its preparation.
- Success fee: which is the amount paid once the research and planning mandate has been
completed successfully?

The Sponsors must pay the following arrangement fees:

- Retainer fee: to cover the arranger's fixed costs for the agreement in issue.

-Arrangement fee: Which is used as a backup assurance if the lead arranger is unable to locate
financial intermediaries interested in the deal.

Sponsors solely pays fees to the financial advisor and the designated lead arranger. However, pay
a commission to the other banks involved in the fundraising. As a consequence, the lead
manager, manager, and co-manager earn an up-front management charge (comprising the
arranging cost) and a commitment fee, while the agent bank receives an agency fee that fluctuates
depending on the number of banks participating in the pool.

Banks and financial institutions participating in the funding can be Multilateral Agencies,
Regional Development Banks, Bilateral Agencies, leasing companies (offer a specific product,
these companies must be kept separate from banks (commercial or investment), or leasing
companies (offer a specific product, these companies must be kept separate from banks
(commercial or investment).

1) Multilateral Organizations

The following are multilateral organizations:

- IBRD (International Bank for Reconstruction and Development), which specializes in

developing low-income nations with high reputation. They provide direct loans (to
stimulate the private sector through co-financing ventures), partial risk guarantees
(guarantees in response to political risk), partial credit guarantees, and enclave guarantees
(Earmarked for so-called enclave projects).
- IDA (International Development Association) offers financial assistance to impoverished
nations who do not fulfill the requirements for World Bank-IBRD financing. They
provide loans with significantly subsidized consulting terms.
- IFC (International Finance Corporation) offers finance (loans and equity) for private
initiatives in developing nations across all industries. Its aim, in reality, is to encourage
private-sector investment. They provide loan programs (to ensure the participation of
private investors and creditors), equity investments, derivatives to implement hedging
policies (swaps to hedge interest and exchange rate risks, as well as other derivative
products to assist clients in managing financial risk), and guarantees (similar to those
issued by IBRD).
- MIGA (Multilateral Investment Guarantee Agency) supports direct foreign investment in
emerging economies by offering political risk insurance.

2) Regional Development Financial Institutions

Regional Development Banks are as follows:

- European Investment Bank (EIB): which promotes EU objectives by providing long-term

finance for specialized projects that fulfill tight standards in terms of review and selection
of the businesses involved. They also deal with initiatives where the project benefits
economic growth and EU cohesion. The EIB does not assume project completion risk and
 instead seeks guarantees from commercial banks to cover its own risk. EIB also finances
ventures outside the EU and accepts risk in the most limited sense, as well as requiring a
full bank guarantee to cover business risks under the same financing circumstances as
projects within the EU;
- African Development Bank (AfDB): This bank promotes sustainable economic growth
and poverty reduction in Africa through loans and equity investments, as well as
infrastructure projects through advisory services for deal structuring and support to public
bodies in order to create a favorable institutional environment. The bank provides loans
and stock investments but does not operate the firm.
- Islamic Development Bank (IDB): The IDB operates on Islamic Law principles and does
not charge interest on loans. The bank provides loans (only for projects with a significant
social and economic impact; the bank does not charge interest but charges a minimum of
2.5 percent fee), leasing (to finance profitable projects with a maximum financing amount
of 35 million Islamic dinar), and sales by installments (used to finance fixed assets; no
commitment fees are charged), and equity investments (banks engage in the equity of a
member-country firm through initiatives compliant with Islamic law).
- Asian Development Bank (ADA): focuses in important sectors such as
telecommunications, electricity and energy, water, and transportation infrastructure (ports,
airports, toll roads); beneficiaries are frequently SPVs with BOOT or BOT concessions.
They provide loans, credit upgrading, and equity investments.
- European Bank for Reconstruction and Development (EBRD): encourages target nations
to enhance their regulatory, institutional, and political frameworks by funding up to 35%
of the overall project cost. The project must be located in the target nations and be
lucrative enough to be suitably funded with sponsor equity. Loans, guarantees, and equity
investments are available from the bank.
- Inter American Development Bank (IADB): provides loans and guarantees (political risks
are limited to 50% of the project's cost, or $150 million USD). Instead, equity investments
are done through particular funds.

3) Bilateral Agencies
Bilateral agencies are entities related to particular governments for economic policy goals as well
as commercial and worldwide promotion of that country's enterprises. Bilateral organizations
include:

- Development agency: In contrast to the concessional assistance model, development

agencies function as financial investment houses, making loans and investing in the equity
capital of enterprises while pursuing industrial and financial development goals based on
market principles and practices.
- Export Credit Agencies: These organizations use the different types of finance made
available to them by their governments to stimulate the export of products and services.
ECA is involved in financing and other businesses. These activities are classified into
three groups. Intermediary lending (lending done through intermediaries), Direct lending
(traditional lending), Interest rate equalization ( designed for importing companies by
commercial bank at lower rate than market interest rate). Insurance operations include
providing services only to national banks, working with all banks operating in the home
country, and collaborating with any and all banks, regardless of location.

Project finance can be funded in a variety of ways. The first of these is equity. Equity funding
indicates that sponsors will provide equity to the project either before loan drawdowns, after the
full drawdown of senior equity, or at a pro-rata clause based on the specified Equity/ Debt +
Equity. It can also be a stand-by equity agreement in which sponsors must gather more equity
money in order to keep the station at the original pre-agreed-upon level. The second kind is a
subordinated loan, which is intended to give financing to a project while boosting financial
flexibility and avoiding the dividend trap (when the value of depreciation exceeds the debt
service and net income exceeds the cash flow available to sponsors).
Then there is senior debt, which is debt that is collateralized by all of the project assets and can
be repaid through variable principal payment (the rate charged moves up or down in accordance
with changes in interest rates), dedicated percentage (cash flow available is linked to the debt
service through a fixed percentage), and hybrid debt (cash flow available is linked to the debt
service through a variable percentage). It can also be a stand-by equity agreement in which
sponsors must gather more equity money in order to keep the station at the original pre-agreed-
upon level.
The second kind is a subordinated loan, which is intended to give financing to a project while
boosting financial flexibility and avoiding the dividend trap (when the value of depreciation
exceeds the debt service and net income exceeds the cash flow available to sponsors).
Then there is senior debt, which is debt that is collateralized by all of the project assets and can
be repaid through variable principal payment (the rate charged moves up or down in accordance
with changes in interest rates), dedicated percentage (cash flow available is linked to the debt
service through a fixed percentage), and hybrid debt (cash flow available is linked to the debt
service through a percentage fixed by the arranger or mini perm structure (the SPV repay the
interest on the facility and only a portion of the principal). This mini per can be either hard
(duration of the loan established on a time horizon) or soft (duration of the loan not specified on a
time horizon) ( long loan maturity). Following that, there is leasing, which allows the SPV to
lease the investment rather than purchase it. That is, the SPV will simply use the investment
rather than own it.
Then there are project bonds, in which the SPV sells bonds to institutional investors with long-
term asset allocation profiles, such as investment funds, investment banks, commercial banks,
damage insurance companies, and foundations.

Bonds can be classified as domestic, international, private placement, tender offer, secured or
unsecured, senior or junior bonds, fixed or variable rate bonds, bullet payment or amortizing
schedule. Project bonds can be used for the following purposes:

- Investor objective in order to attract investors if the market is underdeveloped.

- Tenor of Financing for long term project
- The sponsors' financial flexibility is preserved, allowing banks and other investors to
engage in the project.
- Inflation-linked bonds to shield investors against rising inflation.
- Funding use and payback structure; when funds are received, they can be promptly
reinvested until the funds are needed.
- Credit policy, as well as market opinion
- Establishing the terms and conditions of funding,
- Confidentiality,
 - Covenants and monitoring management it of the project
- Renegotiation of refinancing contract terms Sponsors might amend the original
contractual terms and conditions established for the agreement by utilizing project money.

Private placements with a group of investors are used to issue project bonds. These transactions
are carried out through intermediaries or third parties such as:

- Rating companies
- The bond paying agent and the trustee: The bond paying agency is in responsibility of
transferring monies from the issue's placement to the SPV. And the trustee represents the
bondholders' interests by holding securities on their behalf and calling meetings to vote on
certain issues.
- The project bond bookrunner is a financial counselor who relies on the evaluation
completed by the SPV's chosen investment bank.
- The syndicate : managers and the selling group.
- A subscription agreement is a contract based on the relationship between the issuer and
the lead manager, as well as the features of the securities themselves.
- The final bond prospectus.

Municipal bonds are a type of project financing in which bonds are issued by public bodies to
finance projects related to the objective of local governments. They are structured similarly to
project bonds and are divided into three types: general obligation bonds, project revenue bonds,
and specialized revenue bonds.

After the project has been completed and the results have been positive, the sponsors may choose
to re-run it in order to maximize their profits. This is accomplished by refinancing. This
refinancing can be accomplished by:

- Allowing sponsors to withdraw funds from debt reserves.

- Reducing the harshness of covenants
- Lowering loan margins
 - Extending loan maturities
- Improving leverage
- Converting syndicated loans into project bond offerings.

The refinancing might be soft (meaning that the sponsors will revise the terms of the credit
arrangement without changing the loan term or leverage) or hard ( the sponsors will change the
loan tenor and the leverage radically).
The sponsors can pick a takeover (new lenders replace the previous ones), new financing (the
money is collected from a new group of lenders who contribute more capital with a higher
seniority), or bond issuance (the SPV issued bonds in order to collect the money needed to
reimburse the investment).