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  MEANING OF PROJECT FINANCE:-

Project finance is the funding of long term infrastructure, industrial projects, power, plant, etc.
Where project debt and equity used to finance the project are paid back from the cash flow
generated by the project When we talk project obviously it involves numbers of investors &
equity even they are well known as sponsors, who will majorly in project for which the
promoter later pay off borrowed capital through cash flow generated by the project.

 The two key aspects of project financing are:-

1. The project revenues (cash flow) are expected to services debt or equity interest
taken by the providers of capital.

2. The loans are secured by the project assets or, to the extent security interest are
restricted or have limited value, are secured by contingent support from sponsors
and other project participants.
 NUTURE OF PROJECT FINANCE:-

1. New /Greenfield project:-

 A Greenfield project can be described any project that a team starts from scratch.
 The term of green filed come from real estate, where it conveys the image of a literal
green – field site for development, undistributed by previous construction.
 Greenfield development refers to developing a system for a totally new environment and
requires development from a clean slate – no legacy code around.

2. Brownfield project:-

 Brownfield project is term used in urban planning, which means land that has been used
previously, but lying vacant or unused now.
 A brownfield project is one that carries constraints related to current state of the site.
 IMPORTANCE OF FINANCE:-

 The project finance offers various benefits such as the opportunity for risk sharing,
extending the debt capacity, and maintaining a competitive advantage in competitive
market.
 Project finance is useful tool for companies that wish to avoid the issuance of a
corporate repayment guarantee, thus preferring to finance the project in an off
balance sheet manner.
 Sponsors can raise funding for project based simply on the contractual committees.
 Project finance also
permits the sponsors to
share the project risks with
other stakeholder.
 The project finance route
empowers the providers of
funds to decide how to
manage the free cash flow
that is left over after
paying the operational and
maintenance expenses and other statutory payments.
 Financing project through the project finance route may enable the sponsors to
maintain the confidentiality of valuable information about the project and maintain
competitive advantages.
 SOURCES OF FINANCE:-

SOURCES OF FUND

EQUITY TERM LOAN DEBT

EQUITY:-

 Equity is provided by project sponsors, government, third party private investors,

and internally generated cash.
 Equity refers to capital invested by sponsor of project and others.

TERM LOAN:-

 These loans are long-term debts raised by companies that come with a schedule for
payments and interest paid in installments at fixed and floating rates.
 However, these loans are not granted to businesses without sound financial
statements and promise of creditworthiness.

DEBT:-

 Project debt means indebtedness of one or more project subsidiaries incurred for
the purpose of holding assets.
 PARTIES INVOLVE IN PROJECT FINANCE:-
 TYPES OF FINANCE:-

TYPES OF FINANCE

WITH RECOURSE- NON RECOURSE-TO

TO SPONSOR SPONSOR

 WITH RECOURSE-TO SPONSOR:-

Recourse debt is secured by the personal collateral of the borrower. In the case of
default, resources debt allows the lender to collect on the particular property as
well as the borrower’s personal assets.

 NON RECOURSE-TO SPONSOR:-

Non-recourse debt is secured only by specific property involved in transaction. The

borrower is not personally liable for the debt on the property. In case of default
nonrecourse debt allows the lender to collect on particular asset which are pledge
by borrower for taking loan.
 PROCESS OF PROJECT FINANCE:-

 Under process of project finance planning is basic analysis to determine whether a

project s worthwhile to justify feasibility study.
 It includes economic analysis, commercial analysis, technical analysis, ecological
analysis and marketing analysis.
 Final selection on the basis of finding in analysis.
 It encompasses analysis of results of net present value, internal rate of return,
payback period, sensitive analysis, etc.

 DETAILED PROJECT REPORT:-

 A detailed project report must include the following information:

Brief information about the project
Experience and skills of the people involved in the promotion of the project
Details and practical results of the industrial concerns of the promoters of
the project
Project finance and sources of finance
Government approvals
Raw material requirement
Details of the requisite securities to be given to various financial
organization
Other important detail like; management team of the project detail about
building, plant, machinery
 KEY RATIO IN PROJECT FINANCING:-

A. Leverage ratio:- A leverage is any one of several financial measurements that

assesses the ability of company to meet its financial obligation and operating
expenses.

B. Liquidity ratio:-A liquidity ratio is type of financial ratio used to determine a

company’s ability to pay its short term debt obligation.

C. Loan to value ratio:-Loan to value ratio represent the proportion of an asset’s

value that a lender is willing to provide debt financing against. It’s usually
expressed as percentage. Loan to value’s tending to be higher for assets that are
considered more “desirable” as collateral.

D. DEBT SERVICE COVERAGE RATIO:-The debt service coverage ratio is

measure of cash flow available to pay current obligation. Debt service coverage
ratio is used to analyze firms, projects, or individual borrower.

E. PRICE EARNING RATIO:-The price earnings ratio is one f the most widely
used metrics by analysts and investors. Price earnings ratio indicates how many
earning the investors are willing to pay for the share.

F. PROFITABILITY RATIO:-Profitability ratios are accounting ratio that helps in

determining the financial performances of business at the end of accounting
period. Profitability ratios show how well a company is able to make profit from
its operations.
 DOCUMENTS:-

1. PROJECT DOCUMENT: - These are the incorporation document of the project

company and its sponsor. The project company is incorporated as per government
authority.
2. OPERATIONAL AGREEMENT: - The operational agreement is the main
document under which certain right/concession is granted by the government
authority in favor of Project Company. The risk of cost and time in such project is
born by Project Company.
3. PROPERTY AGREEMENT:-This is an agreement under which the property or
the right under the same are transferred by the government to project company
4. OPERATION AND MAINTENANCE CONTRACT:-The operation and
maintenance of the project is some time taken over by Project Company
sometimes outsourced to another operator.one of the key issues in operation and
maintenance contract is efficient management of operations to maximize the
revenue so that lender are paid in full.
5. SUPPLY CONTRACT:-This contract provide supply of raw material, fuel or
other inputs necessary for operating facilities. The price various terms and
conditions of supply contract are important consideration in structuring project
finance.
6. OFF-TAKE AGREEMENT:-The off-take agreement is the agreement under
which the off taker purchase the output from facilities built by Project Company.
The off take agreement provide constant revenue to project company.
7. FINANCING DOCUMENT:-Financing document is the set of contract between
project company and the lender which layout the term and condition of financing
the project by lender.
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