Fundamentals Of Project Finance

The goal of this course is to equip participants with an overview of Project Finance by taking them through all stages of a Project Finance transaction, so they can apply the techniques. 

Key Learning Outcomes: 

• Review of the characteristics of a Project Finance vs other debt financing options
• Apply a structured and systematic approach to financing projects using some of the techniques of Project Finance
• Recognize the key characteristics of a robust project and identify the weakest links in the transaction
• Use qualitative and quantitative tools and measures to distinguish the key risks
• Interpret each of the key risks to determine their severity and potential impact on the transaction structure
• Appreciate how the mechanisms in the transaction documents operate to protect the creditors and evaluate the protection provided
• Build a credit rationale in order to make and substantiate financing decisions

Who Should Attend:

• It has been assumed that participants will have limited practical knowledge of Project Finance, but participants should already have a sound knowledge of financial analysis, the key features of banking products and commercial aspects of banking documentation. 
• It will also be assumed that participants are familiar with investment appraisal techniques such as IRR and NPV. An understanding of the basic principles of company valuation will be helpful.

Methodology:

• A mixture of formal presentations, exercises and case study work.
• To provide continuity there will be a core case study company that will be used throughout the training to illustrate and reinforce the topics covered in the training programme.
• This course is not a financial modelling training programme but a simplified financial model will be used for the core case study company to review underlying assumptions and to sensitize key financial drivers in the case study project

Content:

• Day One
• Introduction
• Key characteristics of Project Finance and factors influencing the choice of Project Finance vs. other debt financing options
• The principal sectors for Project Finance transactions
• Project Finance vs the financing of projects
• Intensive overview of a transaction to illustrate key aspects of Project Finance and the key parties involved
• Ownership and sponsors – do the sponsors have the technical and financial strength needed? Are there unmitigated conflicts of interest?
• Characteristics of strong sponsors
• Ownership structure and relationship with key parties to the transaction
• Operational and financial resources; strategic importance
• Segregating cash flows and de-linking from related parties
• Project investment criteria – what are the objectives of the key stakeholders?
• Measures used by investors: Payback period, Net Present Value (NPV), Internal Rate of Return (IRR)
• Measures used by lenders: Leverage, debt service, loan life, project life cover ratios and economic rationale
• Cost to the user: Value for money and affordability
• Non financial objectives such as environmental and social impact
• Jurisdiction, legal and expert reports – is there a proven legal and regulatory environment? Has the project been independently assessed?
• Issues to consider: Legal framework, licenses, regulation, legislation, etc.
• Project contracts
• External technical reports: Clarity, transparency and timeliness
• Assessing the Risks
• The aim of this section is to identify and evaluate the main project risks.
• Overview of the key risk categories in a Project Finance structure and typical mitigants
• Discussion of risks in selected transactions and in different business sectors to illustrate some lessons of experience
• Macro risks – how will a project be impacted by the environment in which it is operating?
• Country, political and regulatory risks: Role of governments and related sovereign risks
• Macroeconomic risks and understanding their impact on project risks
• Industry risks
• Social-environmental exposures
• Event Risk and force majeure and potential impact on project viability
• Completion risk – will the project be completed on time and within budget to the required specifications?
• Contractors: Attributes of strong contractors
• Cost structure: Contracts, budgets and allocation of costs
• Delay risk and contract terms: Capacity to accommodate delays and transferring risk
• Technology risk: factors which increase technological risk
• Operational risk – how predictable are the revenue and cost profile of a project?
• Revenue risk/Off -take:  How reliable is the revenue stream? Demand risk arising from multiple payers
• Supply risk: Quality and price of resources and products required for operation
• Operator: uncovering risk related to the operator including performance, reputation and financial position
• Technology risk: exposure to technological change
• Costs: Makeup, timing and potential volatility of operating costs
• Early termination risk: Events which may lead to termination pre-maturity and lenders’ step-in rights. Principles in dealing with compensation for debt and equity providers in the event of termination of project concessions
• Counterparty risks: Risks relating to key parties to a project
• Day Two
• Debt perspective - Debt Service, Capital Structure and Counterparty Risk – what is the desired capital structure and optimum sources of finance? Currency and interest rate exposure
• Evaluating the underlying operational and financing assumptions
• Assessing the capital structure of the project entity and interest and currency exposures
• Funding providers and types of funding
• Debt profile: Amount, term, amortization schedule, currency and interest rate exposures
• Determining the project’s capacity to generate stable cash flow to service the debt levels – base case and appropriate stressed sensitivities
• Assessing the project debt service capability using DSCR (Debt Service Cover Ratio), LLCR (Loan Life Cover Ratio), PLCR (Project Life Cover Ratio)
• Counterparty risks: Creditworthiness and structural features to mitigate risk, and potential use of credit enhancement
• Project Finance – equity providers’ perspective
• Types of equity investors and their approach
• Risk and return; cost of capital and valuation issues
• Understanding the equity investor’s approach to achieving returns from the project company, including operating relationships with the project company, and cash extraction through re – financing
• The project financial statements and review of key assumptions – are the assumptions realistic? What are the key drivers of financial viability?
• Are the assumptions realistic?
• Key elements in the structure of Project Finance spreadsheets
• The principal financial measures to assess potential financial viability – DSCR, LLCR, PLCR, IRR, NPV, Cost to the User and Value for Money
• Lessons from the past – what can be learned from past transactions about the value of forecasts and feasibility studies?
• Debt Structure – Documentation – key elements of the potential structural protections in debt documentation
• Assess the appropriateness of the capital structure and features of the debt structure
• Security and creditor rights
• Payment waterfall
• Collateral and assignment of contract rights
• Rights of the controlling classes, inter-creditor issues
• Structural features
• Debt service covenants
• Reserve accounts, cash sweeps, profit distribution controls
• Refinancing risk