Project Finance

7/17/2019 Project Finance

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Project Finance

By

S.CLEMENT



Project Finance -features

1. To finance – New, Exansion, Mo!erni"ation,#i$ersification etc

%. &i'( $a)ue in$est*ent+. Lon'er estation erio! – rea e$en erio! is

)on'er

/. &i'( ris – srea! o$er )on'er ti*e (ori"on an!future is fu)) of uncertainty

0. rre$ersi)e !ecision – !ifficu)t to co*e out or 2uit



Project Finance

3 4 fun!in' structure t(at re)ies on future cas( f)owfro* a secific !e$e)o*ent as t(e ri*arysource of reay*ent, wit( t(at !e$e)o*ent5s

assets, ri'(ts an! interest )e'a))y (e)! asco))atera) security

3 t )oos in to cas( f)ow as co*are! tocon$entiona) cororate )en!in' w(ic( )oos tot(e a)ance s(eet an! inco*e state*ent.



Project finance - structure

3 Cost of project

3 Lan! 6 site !e$.

3 Bui)!in'

3 Mac(inery

3 7t(er assets

3 Pre o. ex.

3 Mar'in for 8.C

3 Contin'encies

3 Means of finance

3 Caita)

3 Ban )oans

3 9n sec. )oans

3 Susi!y



Project finance in$o)$es

3 M4NE:4L

3 FN4NC4L

3 TEC&NC4L3 C7MME:C4L

3 LE4L

3 EC7N7MC4L



3 Most sujecti$e asect

3 Tyes of ro*oters

– Existin' co*anies – :L;Bajaj 4uto – First 'eneration – E.'. Mr. Narayana

Murt(y of nfosys

– o$ern*ent; PS9s – S4L, 7NC etc – Forei'n ro*oters – Pesi;Coe;For!

*otors. Co$ere! un!er F#.

Mana'eria) 4raisa)



Mana'eria) 4raisa)3

Mana'eria)3 Pro*oters5 trac recor! – in!i$i!ua) ;'rou; (ow'rou co*anies are *ana'e!.

3 <ua)ification – tec(nica) or ot(erwise

3 Co*osition of oar! - = of in!een!ent;rofessiona) !irectors

3 Mana'e*ent structure – centra)i"e!

;!ecentra)i"e!; reortin' syste*s3 Cororate 'o$ernance – et(ics;

;transarency;!isc)osure

3Stae in t(e usiness – (i'( or )ow



Financia) araisa)

3 Esti*ates of rofitai)ity, cas(-f)ow an! a)ances(eet3 More e*(asi"e on cas( f)ows3 4ssu*tions un!er)yin' rofitai)ity rojections

3 Critica) assu*tions – Installed capacity – Capacity utilization – 1st /2nd /3rd year etc – Product mix – Consumption of inputs & prices

-- ales realization -- Cas! realization



3 #et E2uity

3 Cas( f)ows –rea)istic $is->-$is to )oanreay*ent

3 Breae$en; cas( BE

3 rofitai)ity

3 #SC:

3 NP?;::

3 Sensiti$ity ana)ysis

FN4NC4L 4PP:4S4L



3 Co*are rofitai)ity wit( t(at of existin' fir*s in

si*i)ar )ine, articu)ar)y t(e PB#T *ar'in.3 "P#/$net present %alue I'' $internal rate of

return met!od@ Consi!ere! to e est *et(o! fore$a)uatin' t(e caita) in$est*ent roosa)s.

3 t taes into account ti*e $a)ue of *oney3 T(e su* of *oney recei$e! in future is )ess $a)ua)e

t(an it is to!ay. Present $a)ue of ruee to erecei$e! is )ess t(an one. E.'. :e 1AA to!ay *aynot (a$e t(e sa*e $a)ue after one year.

3 8it( Passa'e of ti*e resent $a)ue of ruee to erecei$e! in future wi)) 'o on !ecreasin'

3 Tec(ni2ue of fin!in' resent $a)ue of *oneyt(rou'( !iscountin' is NP?;:: *et(o!

Financia) araisa)



3 Effect of a!$erse $ariance of critica)e)e*ents on $iai)ity is exa*ine!

3 Tyica) tests are3 :e!ucin' sa)es $o).; Price3 ncreasin' cost of inuts3 ncrease in roject cost

3 Effect of FE f)uctuation3 :e!uction in caacity uti)i"ation.

Financia) araisa) –Sensiti$ity ana)ysis



Tec(nica) araisa)

3 #arious areas co%ered are

– (ocational aspects

– Process

– )ec!nical arran*ements – 'a+ materials

– ,tilities

– n%ironmental factors

– Manpo+er

– Implementation sc!edule



(ocation

– Proximity to mar.ets e0*0 peris!ale products

– Proximity to ra+ material supplies resource

ased imported ra+ material 0*0 Cement/u*ar

– Proximity to mar.et – 0*0 lectronics – 4%ailaility of laour 5uality 5uantity cost

relations

– ffluent disposal

– 6t!er infrastructure po+er transportation +ateretc0 tand y arran*ement for po+er +ater etc

– 7o%ernmental Policies restrictions and sops



Tec(nica) arran'e*ents3 )ec!nical collaoration

3 (icensor of .no+-!o+/ asic en*ineerin*

3 Patents/ updation clause

3 Plant & mac!inery

3 7uarantees/ +arrantees – Collaorator/ P&M

supplier/ 8etails of en*ineerin* contractor

3 4pproac! to 9force majeure: conditions –eart!5ua.e/storm etc

3 )ermination



3 Tec(nica) now-(ow a'ree*ent – Su)y; $ettin' of asic en'ineerin' – uarantees

– Li2ui!ate! !a*a'es for non-erfor*ance – Trainin' of ersonne) – :oya)ty

– n!e*nity

Tec(nica) arran'e*ents



:aw Materia)

3 'a+ materials & 5uantity3 ustained a%ailaility

–Imported/ indi*enous – Major suppliers

3 Prices of ra+ material – Price %olatility – 0*0 oil –

Past trends in *ro+t! – 8uties – customs/excise3 4rran*ements for supply



3 Conse2uences of !e)ay

–ncrease in roject cost

–Fun!in' o$errun –Effect on $iai)ity

–Loss of *aret

–Confi!ence )e$e) of Fs

IMP(M")4)I6"

C;8,(



Co**ercia)3 Pro!uct rofi)e – sustitutes,in$entions

3 Custo*er rofi)e – (i'( or )owen!;corroates;'o$ern*ent;o$erseas etc

3 Co*etitors rofi)e – )oca);internationa)

3 #e*an! 6 su)y;*aret s(are

3 *ort t(reat- 8T7; Tra!e )oc or CEC4co*re(ensi$e econo*ic cooerationa'ree*ent

3 Pricin' – co*ati)e wit( *aret;e)asticity ofrice c(an'e

3 Maretin';Se))in' arran'e*ents

3 o$t. Po)icy – u!'et;forei'n tra!e o)icy ;F#



Le'a)

3 Tit)e to t(e roerty

3 7ject c)ause in Me*oran!a*

3 Powers to orrow 6 create c(ar'e



P:7DECT ST:9CT9:E

Project SPV

Sponsor 2

Concession

Agreement

Equity

Lenders

Construction and

O&M Contractors

EPC

ContractO&M

Contract

Loan & Security

Documents

Sponsor 1Sareo!der"s Agreement

#$A %an

#$A Agreement

'nsuranceCompany

'nsurance

Po!icy

(o)ernment

LEN#E:S

(enders n*ineer



'is.s 4nalysis –8(y3 Many projects !a%e<

– (ar*e in%estment outlays – (on* periods of project payout – Incomplete s!arin* of information and tec!nolo*y

especially +it! forei*n in%estors – 8ifferences in t!e aility of t!e parties to ear

ris.s – ,nstale contracts

– Projects may e attracti%e in a**re*ate ut areunattracti%e to one or more parties due touncertainties aout s!arin* ris.s and returns0



:is ana)ysis

3 trate*ic 'is.s – Mar.et demand more often t!an not t!e demand

projections !a%e little crediility0

– 6peratin* costs often underestimated0

– ,nexpected/ unanticipated capital costs.

3 =inancial 'is.s – Interest rate c!an*es0

– Currency/ forei*n exc!an*e fluctuations0

–(i5uidity – cas!s flo+ mismatc!



3 6perational 'is.s

– Su)y c(ain *ana'e*ent

– nfor*ation syste*s

– ey *ana'ers3 ;azard 'is.s

– Proerty !a*a'e

– Le'a) riss

– 8orersG co*ensation

– Natura) !isasters

:is ana)ysis



:is contro)

3 8it(in Co*any5s Contro)

3 7utsi!e Co*any5s Contro)

3 8it(in Len!er5s Contro)

>I);I" C6MP4"?@



3 7eratin' :is -

– Tec(nica)

– Cost – Mana'e*ent

3 Particiant :is

3 En'ineerin' :is or #esi'n :is3 Co*)etion :is

>I);I" C6MP4"?@

C6")'6(

6,)I8 C6MP4"?@



3 Su)y :is3 Maret :is3 nfrastructure :is

3 En$iron*enta) :is3 Po)itica) :is3 Force Majeure :is -

– Te*orary

– Per*anent3 Forei'n Exc(an'e :is

6,)I8 C6MP4"?@

C6")'6(



'IA ;4'I"7

PROJECT COMPANY

BANKSSPONSORS

SHAREHOLDERS’

AGREEMENT

CREDIT

ENHANCEMENT

LOCAL LAWS

GOVERNMENT

SUPPLIERS

EPC CONTRACTOR

OPERATOR

AGREEMENTS

SUPPLY

AGREEMENTS

EPC CONTRACT

O&M AGREEMENT



:is an! ris *iti'ation

3 :iss

3 Po)itica)

3 nterest rate

3 Li2ui!ity

3 Force Majeure

3 Exc(an'e rate

3 :is *iti'ation

3 4ritration c)ause

3 &e!'in'

3 Cas( f)owarran'e*ent;

stan!y

H nsuranceH &e!'in' - FC



Strate'y of :e)iance Petro)eu*

3 8(y :PL is t(e *ost rofita)e refinery int(e wor)!

3 &ow :PL can ac(ie$e a refinin' *ar'in of I

J-1A;arre) w(ic( is one an! (a)f ti*es(i'(er t(an t(e ')oa) )ayers

3 Sin'aore refineries can ac(ie$e just

I+;arre).

3 8(at is t(e strate'y 8(at is secret ofsuccess



3 4i)ity to ui)! )ar'er rojects c(ea)y+K= )esst(an in 9S

3 Most ot(er refineries si'n )on' ter* contracts

co$erin' a)) t(eir nee!s an! tai)or *a!erefinery tec(no)o'y. t assures su)y securityut not rice security.

3 :PL ote! for (i'()y co*)ex refinery out of

%+AA !ifferent confi'urations for a to crac a)))ow-$a)ue fractions as fue) oi) into (i'(er$a)ue ro!ucts an! co*)ex refinery cou)!refine a wi!e $ariety of cru!e.




3 7f course, t(is f)exii)ity ca*e at a ricesince co*)ex refinery cost is *uc( *oret(an stan! a)one.

3 &ow !i! :PL justify suc( an exensi$e an!co*)ex co*are! to ot(ers.

3 :PL too (u'e et on co*osition of future

oi) su)ies i.e. execte! t(at su)y )ow2ua)ity cru!e wi)) outstri t(at of (i'( 2ua)itycru!e creatin' wi!enin' rice !iscount for)ow 2ua)ity $arieties.




3 T(is wi)) *ae it rofita)e to uy )ow 2ua)itycru!e w(ic( cou)! not e rocesse! inefficient)y in si*)e refinery ut in co*)exrefinery.

3 By tracin', t(e rices of !ifferent cru!e an!ro!ucts, :PL cou)! sot oortunitiescontinuous)y to uy c(ea cru!e $ariety.

3 Si*)e refinery )ace! t(e f)exii)ity to switc(fro* one to anot(er cru!e.

3 :PL et t(at t(is f)exii)ity wou)! justify (i'(

cost of co*)ex refinery.




3 :PL strate'y is ase! on oortunis* inse)ectin' rofita)e cru!e to i*ort at anyoint of ti*e

3 t !oes not assure su)y security. :PL (asfir* contracts for on)y (a)f its caacity . Fort(e rest, it scans t(e *aret for s(ort ter*ar'ains.

3 nsecurity of su)y can trans)ate in tosecurity of (i'( rofits.




Successfu) roject financeentai)s ...

3 !entification of roer roject

3 :i'(t transaction structure

3 Proer ris i!entification, a))ocation an!*iti'ation