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Flashcards in Week 4 Deck (15):
1

Corporate finance vs Project finance

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2

Incentives of the various counterparts in a project finance

  • Equity
  • Debt
  • Suppliers 
  • Government

3

Equity (incentives in project finance)

–Need for leverage effect to maximize profit on successful projects;

–Non-recourse structure => deconsolidation considerations.

4

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.

5

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.

6

Government (incentives in project finance)

–Most project financings are infrastructure related projects.

–Government capital constraints;

–Sometimes, shortage of technological know-how.

7

Various risks in a project finance

  • Supply
  • Demand/traffic
  • Currency
  • Operational
  • Environmnetal
  • Permitting
  • Construction/tech
  • Political
  • Interest rate

8

Two groups of risks in PF

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9

What is a financial model?

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10

Financial model limits:

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11

Main assumptions when financing a project

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12

Key ratios principles

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13

Sensitivity analysis

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.

14

Expected loss methodology

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15