Project Financing Introduction

Project Financing

-Introduction

-Benefits & Disadvantages

-Major Participants

- The mobilization of debt, equity, hedges

and a variety of limited guarantees through

a newly organized company , partnership

or contractual JV.

Benefits & Disadvantages

-Minimizing the equity commitment to be delivered to anyone particular project -Negotiating risk sharing- Segregation project’s liabilities from the corporate balance sheet from accounting perspective

-Delays in financial closing-Higher risk premium for associated loans -Lenders insist on having greater oversight of the project-Lenders view the insurance arrangements as part of the risk-sharing “added cost on the sponsor”

Benefits & Disadvantages

-Reducing taxes “1 entity not 2”-Avoiding restrictive covenants on the corporate balance sheet arising from project’s debt financing-Achieving diversification

- Documentation is lengthy and complex

Major Participants

Sponsors Project Vehicle

Construction Contractors Lenders

Insurance

Providers

Other

Parties

Off-

Takers

ThirdParty

Operator

Resource

SupplierGovernment

Sponsor

Project Vehicle

Construction Contractors

Lenders

Sukuk

Insurance Providers

Other parties

Participants Found In Many But Not All

Project Finance Deals

Off-taker

The entity that is single purchaser of all the

project output subject to a formal contract

The off-take agreement is designed frequently to permit

the project vehicle to hedge against certain risks

“inflation-foreign exchange etc.”

Third-Party Operator

Responsible for the O&M of the project

When a third party operator is not used in a

project, one of the sponsors may undertake this

role.

Resource Supplier

Responsible for the delivery to the project of

necessary fuel

Government

In industrialized countries the central government is

rarely involved in project finance

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