Project Finance(PF)SEWON KIMKEVIN TRAN

CHRISTINA MOHR LUISE LOLENZ

IndexWhat is the Project Finance?Difference between PF and CFStructure of the Project FinanceSPC (Special Purpose Company)Property of the Project FinanceManaging the riskExampleConclusionReferences

1. What is the PF?

1. What is the PF?One of the method of financing for project

The long term financing of infrastructure and industrial projects based upon the cash flows of the project.

Finance for a particular project

Mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project.

2. Difference between PF and CF

2. Difference between PF and CFCorporate finance (CF) is based upon credit

of corporate operating many project.

For CF although the financial condition of one project get better, risk of credit would take place due to the weak of another project operated by that company.

2. Difference between PF and CFProject finance (PF) is different from

traditional forms of finance

The lender principally looks to the assets and revenue of the certain project in order to secure and service the loan.

3. Structure of the PFPF structure involves a number of equity

investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation.

The loans are commonly secured by the project assets and paid entirely from project cash flow, rather than from the assets of the project sponsors.

3. Structure of the PF

4. SPC (Special Purpose Company)

4. SPC (Special Purpose Company)SPC is made by many companies involved

specific project to fulfil narrow, specific or temporary objectives.

SPC are typically used by companies to isolate the firm from financial risk

SPC is created for each project shielding other assets from the bad effects of a project failure.

As a SPC, the project company has no assets other than the project.

5. Property of the PFThorough control of cash flow Because project finance is dependent on the

cash flow estimated before commencing project, through control of cash flow is needed.

Multiple supporter of loan Most of the project using the PF is massive

scale. Therefore, numerous loan institutions comprise syndicate to support the project and decrease the risk of finance.

5. Property of the PFComplex structure of operation/finance

Project finance has complex structure of operation due to many kinds of relationship of the person directly involved contract.

Establish of Independent project company (SPC)

The condition of project doesn’t affect a credit of business owner because it just supports the project establishing SPC and SPC becomes active operator.

6. Managing the risk

6. Managing the riskLenders are concerned with minimizing the

dangers of any events which could have a negative impact on the financial performance of the project

The risk could result in:(1)the project not being completed on time, on budget,

or at all

(2) the project not operating at its full capacity

(3) the project failing to generate sufficient revenue to service the debt

6. Managing the riskType of risk

Participant Risk

Credit Risk

Technical Risk

Currency Risk

Regulatory Risk

Approvals Risk

Political Risk

6. Managing the riskThe minimization of risks involves a three step

process

7. Example

Acme Coal Co and Energen Inc.• Acme Coal Co and Energen Inc. Supplies

the energy to consumers.• Agree to build power plant to accomplish

their respective goals

Acme Coal Co and Energen Inc.• sign a memorandum of understanding to

set out the intentions of the two parties• form an SPC (Special Purpose

Corporation) called Power Holdings Inc.• divide the shares between them according

to their contributions

Acme Coal Co and Energen Inc.• signs a construction contract with Acme Construction to

build a power plant• affiliate of Acme Coal• only company with the know-how to construct a power

plant in accordance with Acme's delivery specification.

Acme Coal Co and Energen Inc.• Power Holdings receives financing from a development

bank and a commercial bank.• These banks provide a guarantee to Acme Construction's

financier that the company can pay for the completion of construction

Acme Coal Co and Energen Inc.• paid as such: 10% up front • 10% midway through construction • 10% shortly before completion • and 70% upon transfer of title to Power

Holdings, which becomes the owner of the power plant.

Acme Coal Co and Energen Inc.• form Power Manage Inc., another SPC, to manage the

facility• is primarily to protect Acme Coal and Energen• If a disaster happens at the plant, prospective plaintiffs

cannot sue Acme Coal or Energen and target their assets because neither company owns or operates the plant.

8. ConclusionEach project financing has a variety of

differences. Each project gives rise to its own unique risks and hence poses its own unique challenges.

In every case, the parties need to act creatively to meet those challenges and to effectively and efficiently minimize the risks in order to ensure that the project financing will be a success.

ReferencesScott Hoffman, The Law & Business of

International Project Finance (3rd ed. 2007, Cambridge Univ. Press).

Marco Sorge, The nature of credit risk in project finance, BIS Quarterly Review, December 2004, p. 91

Project Finance Magazine http://www.projectfinancemagazine.com.