2010512018 hat is Project Finance? - Blog proschool An @® tnitiative FINANCIAL MODELING WHAT IS PROJECT FINANCE? Every project needs financing to implement and run it successfully. Project finance is nothing but sourcing funds to a long term infrastructure project, or any other project, and using the cash flow generated from the project to payback the financing procured, Project finance is often confused with corporate finance, but the two are structurally different. Unlike corporate finance, where a company can directly raise funds from equity and debt, in project finance, the company which invests equity (usually known as hitpssiwwu:proschoolonine.comiblogivhat'-projectfinancal 18201052018 What is Project Finance? - Blog sponsor), forms a Special Purpose Vehicle (SPV) which manages the funds procurement and management of the specific project. What is a Special Purpose Vehicle and why is it created? A Special Purpose Vehicle is a legal entity which is formed for a specific purpose such as a project in this case. During the execution, the project's funding requirements will be solely managed by the SPV. The purpose is to insulate the holding company from any riskiness and eventualities arising in the project. Moreover, when the project funds are duly protected and managed by the SPV, even external investors gain more confidence in the company’s operations. Structure of Project Finance oo cree) Donec can) Be Let's understand project finance with the help of a simple example- ‘The government just announced a much-needed underground metro project for a city worth Rs 3,000 crores. Before beginning any project there is a bidding process. Let's look at the bidding process for Mumbai Metro phase 1 Line 3 for understanding the steps. hitpssiwwu:proschoolonine.comiblogivhat'-projectfinancal 2162010512018 hat is Project Finance? - Blog Bidding — Metro Phase | Line 3 Coming back to the example, the government has approached a corporate to take up this project. In order to carry out this project, a special purpose vehicle (SPV) has been formed by the corporate and the city’s development authority. 30% of the project's cost is to be funded by equity- most of it by the corporate and the rest by government grant. The remaining 70% will have to be funded by debt, But who will lend to this massive project? This is where Project Finance fills the gap. Several banks and financial institutions have a Project Financing arm, which analyses large infrastructure projects like roads, highways, ports, oil and gas projects etc. to evaluate if these are good debt investments. It then arranges debt funding for them. Apart from this, most infrastructure players have their own in-house Project Finance teams as well, which manage the end-to-end financial implementation of their large projects. Again, let's take an example of the financial structuring of the Mumbai Metro Line 1 (Versova-Andheri-Ghatkopar): hitpssiwwu:proschoolonine.comiblogivhat'-projectfinancal a6201052018 What is Project Finance? - log What we can see from the above example is that no single bank is usually willing to lend such huge amount, hence many banks from a group called Syndicate/Consortium to finance the project. Most of the times, the sponsor appoints a leader of the syndicate of banks. In this case, the leader is IDBI bank. So, what does the Project Finance Team do? (1) Advising the client on the optimum loan facility to be availed, by helping them prepare the financial models exact requirement of the project. for the project. This involves forecasting revenues, studying the project requirements, considering the inherent industry risks involved, and giving financial advisory services. (2) Studying the creditworthiness of the loan seeking entity and determining the exact requirement of the project. (3) Assistance in facilitating loans so that the entire process is accelerated, (4) Assistance in compiling of necessary documents that for the loan process. How does a Project Finance company earn money? Project Finance companies or banks typically earn money from the interest income on loan. Apart from that banks can choose to sell them on the secondary market. There are many market Participants who have the desire to purchase these loans as investments. A classic example is insurance companies as they are interested in long-term cash flows, which can be used for duration matching, Moreover, the leader of the syndicate of banks can also earn through Advisory fees. Risk management in Project Finance hitpssiwwu:proschoolonine.comiblogivhat'-projectfinancal 4062onsr2018 What is Project Finance? - log In order to ensure lower levels of project risk, equity and debt provider perform a large amount of due diligence so as to get a better idea about risks associated with a project. One of the major risk elements in the project finance is Repayment Risk. The mitigation process for this is to establish the preferential claim of investors to a project's cash flows. The higher the seniority, the lesser risk one has in a project. Debt holders mostly have the primary claim on cash flows, followed by tax equity investors, and then project sponsors. Project finance life cycle is a long and complex one and it is but natural to have multiple risk elements. Some of the other risk factors in project finance are (1) Construction Risk (2) Currency Risk (3) Operational Risk and (4) Political Risk. Effective management of risk is the crux of project finance and it is the responsibility of the Project Finance Manager to look after this aspect. Below is the example of planning and financing stage of a renewable energy project. At this stage it is required to determine projected revenues, costs and returns and also to quantify risks. “Source: Creen hina Eneray Thus it is evident, Project Finance Manager/Team http://www. proschoolonline.com/blog/project-finance-manager- job-profile/] not only plays a very important role in funding big projects, and liasioning between the loan seeker and the loan giver, as well as risk mitigation, Theyve great demand in the field hitpssiwwu:proschoolonine.comiblogivhat'-projectfinancal201052018 What is Project Finance? - Blog of banking and companies who seek financial advisory for projects. Needless to say that the knowledge of financial modelling and spreadsheets {http://www proschooloniine.com/blog/financial-modelin project-finance/] is very important in this area for cash flow management. Some of the other career options in Project Finance field are: Relationship Management, Project Advisory/Consulting and Debt Syndication. Growing importance of project finance in indian economy Mr Nitin Gadkari, Minister of Road Transport and Highways, and Shipping, has announced the government's target of Rs 25 trillion investment in infrastructure over a period of three years, Which means the India will see lot of power, bridges, dams, roads and urban development in years to come. Most of these will be funded by the Public or PPP (Public Private Partnership) method This clearly shows that Project finance will be on major growth trajectory in future and the economy stands to gain from it. Needless to say, highly qualified and experienced professionals will be great demand to manage and analyse the financing of such massive projects. FEBRUARY 10,2016 BY ADMIN Share this entry hitpssiwwu:proschoolonine.comiblogivhat'-projectfinancal 6