Project Finance
Finance is the
management of money and investments for individuals, corporates, and
governments. Finance is managing capital in a way that earns higher than risk-adjusted
returns.
Finance and Accounting are different by
accounting is the recording, maintenance, and reporting of a company’s
financial records, whereas Finance is managing that money and investments with
return maximization and risk minimization. The term Accounting is mainly used in
accounting firms, corporations. Whereas Finance is used in the Banks and
corporations. Accounting is responsible for preparing financial statements and
Finance is responsible for analyzing the financial statements. Accounting looks
the accuracy, reliability with backward-looking. Whereas Finance concentrates
on the insights and analysis with future-looking.
The important basic points
that should be learned to pursue a career in finance are as follows: -
01. Being
aware of all basic terminologies in finance and able to keep update in the
changes in the finance career.
02. Ability
to analyze and making projections. having sound knowledge of the relationship
between the decisions and their impact.
03. The problem-solving skill, which is a part of finance is the most important basic, to be in the finance career and technically good at excel application in finance
In the case of project finance, it is being
issued to a particular project based on the future cash outflows from the
projects, whereas corporate finance, is an issue that may not be for specific
purpose and duration.
The risk involved in project finance is
much lower due to already the future outcomes of the project is well defined
and the lender has the priority right against all other creditors, whereas
corporate finance is not back up proper security and no guarantee of repayment
of debt with a particular source of income.
CAPEX usually refers to the cost incurred, while starting a business or construction of machinery.
The cover ratio is the ratio of projects discounted cash flow during a period over the amount of project debt at a specified time.
The host country is a
country, in which the project is located, respectively.
Loan life cover Ratio
are the ratios of projects discounted cash flow from the date of measurement up to
the final loan maturity date to the amount of project debt at a specified date.
The present value is
the current value of future cash flows.
The partnership means
a project established by the two or more persons, for the profits and agree to
share the profit/loss incurred in the business operations.
The duration of the PPP
(Public-Private Partnership) the contract is called a Concession Period.
Construction Risk is
the risk involved in relating to the construction of the Project.
Due diligence is the
process of reviewing, evaluating project contracts, and their risk carried out
by both public and the lenders.
Environmental risk is
the risk, relating to the environmental effect pf construction or operation in
the facility.
Equity is the amount
contributed by the investors to the project, by either as share capital or
subordinated debt.
The facility is
referred to as the public infrastructure provided under the PPP contract.
The security agent is
the person appointed by the lenders for holding the securities of the project.
Greenfield project
means where the construction of the project is in a new place, where there was
no major construction previously in that place.
Hard Infrastructure
means physical buildings and other facilities.
Project inflation risk
means risks related to the changes in the rate of price inflation which will
affect the project company Capital and operating expenditure.
Internal Rate of Return
in the rate on the return of an investment calculated from its future cash
flows in the project.
Non-recourse debt is a secured debt/loan, that is secured by a pledge of collateral, typically real property but for which the borrower is not personally liable. In the case of Non-recourse debt, the lender cannot claim any legal proceedings if any loss incurred after realizing the collateral asset. A non-recourse loan is the riskiest debt type of loans for lenders. Even, the non-recourse debt is riskier, banks still offer non-recourse debt, but try to manage their credit risk by the way of offering to the person having a very good credit score.
Mezzanine Finance is a kind of hybrid financing, which has both features of debt and equity financing that provides lenders the right to convert its loan into equity in case of default. Mezzanine finance is a more expensive source of financing for a company when compared with the secured debt. Mezzanine finance is opted generally by the companies, which has moved beyond the startup. Mezzanine finance is being used by companies, which are not willing to pay a huge cost for the capital. In general, Mezzanine Finance is the riskiest finance, where the borrowers may not generate a guaranteed source of income.
Project Finance is
generally used in Economic and social Infrastructure such as Power generation
companies, Electricity and gas companies, Water and telecom projects, Mining
projects, Manufacturing, transportation projects, schools, and hospital
constructions.
The project finance is
being used only for the above-stated projects/works due to as follows: -
01. The work is single
and sole purpose to the specific project/company.
02. These projects are
being very large and time-oriented and mess with other finance in the company.
Hence this project finance will suitable for it.
03. If any loss has
incurred in the project, in general, these projects will be backed up by the
insurance companies to minimize the risk, where project finance is suitable to
it.
04. As this is a long and
lengthy project, repayment can be made only on the generating cash flow from
this project, hence if it is project finance the repayment can be made easily
from the revenue generated here.
05. Project finance is
the off-balance sheet item, where the projects stated above are suitable for
this kind of finance only.
06. Unlike other projects, the projects for this company have a finite lifetime, easier to project the cash flow for the repayment.
There are also challenges of
project Fiance for the lender and by the borrower, what are the best
alternative available to the project finance.
I would like to let you know, the trends of Project Finance in the
various fields of business areas. The project finance is being rated by the
rating agency based on the project completion, projecting their future cash
flows, support of government policies and project of the demand for their final
project product and services, these ratings are further used for the extension
of more finance to the projects if required any.
The primary step to start financial Modeling is taking sales. The growth of sales should be assumed based on the growth rate for the previous years in business sales and consider the same the growth rate for the next five years, if not s=mentioned any things regarding sales.
COGS (Cost of Good sales) and expenses relating to sales should be considered the percentage of sales of the last three years and make the average percentage to forecast for the next five years.
According to the conservatism concept, concerning other income, it should be assumed that there will be no revenue in further years and other expenses should be estimated accordingly.
In the case of depreciation and amortization should be considered equally over the next five years, if any notes/recommendations were given by the respective company. The tax rate should be assumed accordingly to the income of the respective company and applicable slabs.
In the case of any other current assets and long-term assets, it should be assumed that they are as constant in the next few years if no specifications are maintained.
The function of revenue, cost, and debt sheet of the financial model.
The revenue sheet of the financial model reflects the trends of revenue of the respective company according to the assumptions and necessary decisions taken by the company. Revenue sheet is based on the type of business by the company and it reflects the growth of revenue based on the season, cyclical and secular trends, if the business depends on the weather, trend of past, and decisions by the global market respectively.
The cost sheet in the Financial Model shows the expense incurred/to be incurred based on the assumptions/decisions taken by the company. The cost sheet also reflects and helps to analyze the percentage of expenses incurred to the total cost. The cost sheet will let know the expense changes and classify the variable cost, fixed cost, administrative expense, etc.. in detail to analyse the expenses, its impact due to any of the reasons.
The debt sheet in the financial modeling predicts the debt of nature long and short term, we need to make in the upcoming periods and its impact on the balance sheet and company expenses. These debts sheets should be prepared following the direction given, in the case to maintain any certain percentage cash to hold and make debt payment with leftover the cash. This also helps to analyses the repayment of the interest and the principal repayment in detailed, if any moratorium is being raised
The various steps involved in the Fin flow sheet of the financial model is as follows:-
Making sure the project details such as the capital structure of the project involved and it's the various contributions of equity, debt, and if any other sources. Making the assumptions regarding the debt repayment, inflation rate, tax rate, interest rates, and moratorium periods if any given the respective lenders. In case the project is connected with the foreign transactions, foreign exchange rates, and the tenure required to complete the project.
Calculating the revenue to be generated in the duration of the project and any miscellaneous income to be received are projected to calculate complete revenue in the respective years. In general, no forecast of other income to be made in financial modeling. The expenses should be calculated following the projections and include all the miscellaneous expenses. After calculating the total expenses, it is being used for calculating the net income.
Here we need to calculate the EBITDA(Earnings Before Income Tax, Depreciation, and Amortization) by deducting the expenses projected from the income projections. Thereafter, we need to deduct the non-operating expenses, such as depreciation and interest payment from the EBITDA, to arrive at the Income before tax. Through the application of the respective tax rate, we get the Net Income.
The Net Income should be adjusted to any non-cash flows that need to be adjusted if required. Through repayment of cash and non-cash payments, we get the final project cashflow.
The bank checks the Cash flows projected during the project carried out in the respective upcoming period. The source of income generated by the company is available in the market and if there is any threat to the business of the company borrowed, due to it may impact the repayment of the loan. The bank also checks the business is following compliance with the government rules and regulations. The bank checks all the requirements of the above stated, to check the creditworthiness of the borrower and whether the borrower can repay in the future, if not any nominee or surety to pay in case of default of the borrower.
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