We hope that you got a chance to look at our Real Estate example which we had sent across last week, this week we have one more flavour of Financial Modeling for you!
We are covering Project Finance this week. Loosely speaking the term â€œProject Financeâ€ is used to describe a range of financing arrangements company undertakes to finance its large projects. Mainly it has gained attention with the growth in privately financed infrastructure projects in the developing world.
Project Finance Definition
It is the long term financing of projects (like infrastructure) based upon the projectâ€™s forecasted cash flows rather than the balance sheets of the project sponsors. In a project financing structure there are mainly two types of parties involved, sponsors (equity investors) and a syndicate of banks or other lending institutions that provide loan to the project sponsor company. This loans are secured by the project assets and paid fully from project cash flow and are commonly known as non-recourse loans.
Note: In project finance the loan is repaid from the cash flows earned by the subject project rather than from the general assets or creditworthiness of the project sponsors. This loan is secured by the project assets, including the revenue-producing contracts. Another important point is that the lenders are given a lien on project assets, and can assume control of the subject project if the project company has difficulties in complying with the loan terms.
How can a project financing be identified?
Capital-intensive â€“ Generally projects tend to be large-scale that require a great deal of equity and debt capital.
Highly leveraged â€“ Relatively debt capital accounts for 65% to 80% of total project cost.
Long term - The tenor can normally reach 15 to 20 years.
Independent entity with a finite life â€“ Example - In a build-operate-transfer (BOT) project the project company ceases to exist after the project assets are transferred to the local company.
Non-recourse or limited recourse financing â€“ The financing is not primarily dependent on the credit/ capital support of the sponsors or the value of the assets involved. That is, the repayment of the loan will be substantially dependent on the performance of the project itself
Many participants â€“ As the projects are large scale, the transaction will frequently demand participation of numerous parturitions.
Costly â€“ Raising capital through project finance is generally more costly than through other means.
This is the theoretical part of Project Finance, but our years of training in Financial Modeling have taught us that experience is the best teacher. To facilitate your learning, we have created a generic infrastructure project finance model which you can tweak as per your liking and get a feel of how factors such as construction period, loan repayment period and depreciation period impact the Project Finance Model. You can download the Project Finance Model here. Once again, this is a generic model and can be enriched depending upon the specific case concerned.
Pankaj Baheti is a CFA Level III Candidate currently working with Pristine. Prior to Pristine, he was working with Achi Group. He has done his Post Graduate Diploma in Management and loves trekking in the hills of Arunachal.
Global Association of Risk Professionals,
Inc. (GARP®) does not endorse, promote, review or warrant the
accuracy of the products or services offered by Edu for FRM®
related information, nor does it endorse any pass rates claimed by
the provider. Further, GARP is not responsible for any fees or
costs paid by the user to Edu nor is GARP responsible for any fees
or costs of any person or entity providing any services to Edu
Study Program. FRM®, GARP® and Global Association of Risk
Professionals®, are trademarks owned by the Global Association of
Risk Professionals, Inc
CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas®, and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Utmost care has been taken to ensure that
there is no copyright violation or infringement in any of our
content. Still, in case you feel that there is any copyright
violation of any kind please send a mail to firstname.lastname@example.org and we
will rectify it.