Corporate finance vs Project finance
Incentives of the various counterparts in a project finance
Equity (incentives in project finance)
–Need for leverage effect to maximize profit on successful projects;
–Non-recourse structure => deconsolidation considerations.
Debt (incentives in project finance)
–Credit spreads on PF greater than corporate financings;
–Right levels ? Market fixing;
–Remuneration not only on the credit spreads;
–What if project is not considered acceptable for commercial debt providers ? => multilateral, bilateral, export credit agency and development bank;
–Need for control over the project through loan covenants.
Suppliers (incentives in project finance)
–Project finance used to finance infrastructure projects with generally high-ticket items;
–Higher priced contracts because of greater risk assumptions for the suppliers;
–Suppliers often present as equity providers;
–Oligopolistic market with difficulty for new participants to break into the existing club of players.
Government (incentives in project finance)
–Most project financings are infrastructure related projects.
–Government capital constraints;
–Sometimes, shortage of technological know-how.
Various risks in a project finance
- Interest rate
Two groups of risks in PF
What is a financial model?
Financial model limits:
Main assumptions when financing a project
Key ratios principles
also referred to as what-if or simulation analysis, is a way to predict the outcome of a decision given a certain range of variables. By creating a given set of variables, the analyst can determine how changes in one variable impact the outcome.
Expected loss methodology