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Project Finance(PF)

Project Finance(PF). SEWON KIM KEVIN TRAN CHRISTINA MOHR LUISE LOLENZ. Index. What is the Project Finance? Difference between PF and CF Structure of the Project Finance SPC (Special Purpose Company) Property of the Project Finance Managing the risk Example Conclusion References.

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Project Finance(PF)

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  1. Project Finance(PF) SEWON KIM KEVIN TRAN CHRISTINA MOHR LUISE LOLENZ

  2. Index • What is the Project Finance? • Difference between PF and CF • Structure of the Project Finance • SPC (Special Purpose Company) • Property of the Project Finance • Managing the risk • Example • Conclusion • References

  3. 1. What is the PF?

  4. 1. What is the PF? • One of the method of financing for project • The long term financing of infrastructure and industrial projects based upon the cash flows of the project. • Finance for a particular project • Mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project.

  5. 2. Difference between PF and CF

  6. 2. Difference between PF and CF • Corporate finance (CF) is based upon credit of corporate operating many project. • For CF although the financial condition of one project get better, risk of credit would take place due to the weak of another project operated by that company.

  7. 2. Difference between PF and CF • Project finance (PF) is different from traditional forms of finance • The lender principally looks to the assets and revenue of the certain project in order to secure and service the loan.

  8. 3. Structure of the PF • PF structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. • The loans are commonly secured by the project assets and paid entirely from project cash flow, rather than from the assets of the project sponsors.

  9. 3. Structure of the PF

  10. 4. SPC (Special Purpose Company)

  11. 4. SPC (Special Purpose Company) • SPC is made by many companies involved specific project to fulfil narrow, specific or temporary objectives. • SPC are typically used by companies to isolate the firm from financial risk • SPC is created for each project shielding other assets from the bad effects of a project failure. • As a SPC, the project company has no assets other than the project.

  12. 5. Property of the PF • Thorough control of cash flow Because project finance is dependent on the cash flow estimated before commencing project, through control of cash flow is needed. • Multiple supporter of loan Most of the project using the PF is massive scale. Therefore, numerous loan institutions comprise syndicate to support the project and decrease the risk of finance.

  13. 5. Property of the PF • Complex structure of operation/finance Project finance has complex structure of operation due to many kinds of relationship of the person directly involved contract. • Establish of Independent project company (SPC) The condition of project doesn’t affect a credit of business owner because it just supports the project establishing SPC and SPC becomes active operator.

  14. 6. Managing the risk

  15. 6. Managing the risk • Lenders are concerned with minimizing the dangers of any events which could have a negative impact on the financial performance of the project • The risk could result in:

  16. 6. Managing the risk • Type of risk

  17. 6. Managing the risk • The minimization of risks involves a three step process

  18. 7. Example

  19. Acme Coal Co and Energen Inc. • Acme Coal Co and Energen Inc. Supplies the energy to consumers. • Agree to build power plant to accomplish their respective goals

  20. Acme Coal Co and Energen Inc. • sign a memorandum of understanding to set out the intentions of the two parties • form an SPC (Special Purpose Corporation) called Power Holdings Inc. • divide the shares between them according to their contributions

  21. Acme Coal Co and Energen Inc. • signs a construction contract with Acme Construction to build a power plant • affiliate of Acme Coal • only company with the know-how to construct a power plant in accordance with Acme's delivery specification.

  22. Acme Coal Co and Energen Inc. • Power Holdings receives financing from a development bank and a commercial bank. • These banks provide a guarantee to Acme Construction's financier that the company can pay for the completion of construction

  23. Acme Coal Co and Energen Inc. • paid as such: 10% up front • 10% midway through construction • 10% shortly before completion • and 70% upon transfer of title to Power Holdings, which becomes the owner of the power plant.

  24. Acme Coal Co and Energen Inc. • form Power Manage Inc., another SPC, to manage the facility • is primarily to protect Acme Coal and Energen • If a disaster happens at the plant, prospective plaintiffs cannot sue Acme Coal or Energen and target their assets because neither company owns or operates the plant.

  25. 8. Conclusion • Each project financing has a variety of differences. Each project gives rise to its own unique risks and hence poses its own unique challenges. • In every case, the parties need to act creatively to meet those challenges and to effectively and efficiently minimize the risks in order to ensure that the project financing will be a success.

  26. References • Scott Hoffman, The Law & Business of International Project Finance (3rd ed. 2007, Cambridge Univ. Press). • Marco Sorge, The nature of credit risk in project finance, BIS Quarterly Review, December 2004, p. 91 • Project Finance Magazine http://www.projectfinancemagazine.com.

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