Week 1 Questions and Answers PDF

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Week 1 Introduction to Project Finance 1.What are the key features of project finance that distinguishes it from other forms of financing？ ？ -There is limited or no recourse to project sponsors. There is no recourse to the owner of the project, after a particular point of time. -very large scale, require large amount of capital. Although there are other kinds of financing are large scale, project finance always requires large scale, and high capital requirement. -off-balance sheet financing for the sponsor. -few diversification opportunity in the same step. When you put the project together, the risk of project cannot be diversified. What we try to do is to transfer the risk. -the loan won’t be repaid until the project start operating. - in project finance, loan will always be secured, and it is typically secured by the project assets. In non-project finance, loan is subject to negotiation, lenders are typically unsecured.

2.why would businesses consider the use of project finance in a proposed project? What are the alternatives? Rationale: 1.because the project entity will be an SPV, the liabilities and obligations associated with the project debt are a step removed from the sponsors – this limited / no recourse status of debt is often a key driver – the associated off balance sheet treatment of project debt is attractive, as it means no adverse impact on net assets and other ratios, enables preservation of borrowing capacity for other projects, and can also ensure no negative impact on the sponsor’s credit rating. 2. you could be the offtaker, be the construction company, be the designer, you can sell equipment. 3. it is a good opportunity, we won’t miss it, but we can’t do that by ourselves. We bring other sponsors, usually other companies that are not straightaway. Together with that, we still can’t do it, because we don’t know how to commit to our resources. So the project finance can do it. Alternatives: maybe straight debt, securitization. 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? Share price depend on whether it is good or bad news or no news. No news mean we already knew that, there is no new information.

You can argue: stay the same, if it is a very large scale project, when you announce the method of finance, it may not add any news. Best answer: price will go up. if you announce that you will use project finance, you only do this after lender say yes. So you tell the market the lenders like project as well. The lenders will assess the project because they will provide the money, so that’s the signal that there is valuating the project. that’s the new information already expected. 4.who are the main parties to a project financing? Sponsor, lender, government, offtaker, contractors, designer, engineer… 5.What is the main rationale for using project finance, in the case of (i) Sponsors, (ii) Lenders, and (iii) Governments? Sponsors: – – – –

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limited / no recourse status of debt is often a key driver the associated off balance sheet treatment of project debt is attractive project financing enables effective risk minimisation / transfer project financing is attractive when the size and cost of projects is very large, as it enables participation in larger projects than corporate assets / credit standing would otherwise allow. it is also effective for participation in non-core activities.

Lenders: –

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as with any form of financing, lenders (financiers) to a project financing seek to extract a return commensurate with the level of risk lenders to a project financing also typically extract additional returns through the provision of the associated products and services required by the project company

government: –

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Fiscal optimisation: project finance transfers the financing responsibility to the private sector, thereby allowing the government to afford infrastructure by amortising the cost of the asset over the term of the concession Process efficiency: using project finance can eliminate inefficiencies from infrastructure construction, through tighter contracting and increased rigour of execution (i.e. private sector profit motive increases efficiency) Performance risk: the risks of constructing and operating the infrastructure asset are passed to the private sector through project finance contracts...