Credit Appraisal and Project Finance Module No 4 & 5 By Mr. Navneet Saxena All The Best From

1. Credit Appraisal and Project FinanceModule No 4 & 5 By Mr. Navneet SaxenaAll The BestFrom

2. Characteristics of Project Finance

3. Project costs include: Direct costs (including investment costs and operating costs) associated with design and implementation and monitoring and evaluation; and Indirect costs, including: economic costs (e.g. loss of productivity due to more stringent safety procedures); social costs (e.g., adverse health impacts); or environmental costs (e.g., deforestation, land-use changes, greenhouse gas emissions, loss of biodiversity, etc.). Characteristics of Project Finance

4. A cost estimate is obtained through the following steps: Identify Cost Categories: the risk management scenarios is broken down into cost categories; Gather cost data: unit costs must be assessed for each of the cost category identified. This unit cost list can be drawn from various data sources (market survey, statistical collection, etc.) or from direct consultation with providers. Cost studies conducted for similar projects can also be used; and Characteristics of Project Finance

5. Adjust costs to local conditions: where applicable, cost data must be adjusted to take into account local conditions, including timing (costs estimated in past years must be escalated to account for inflation), local market conditions, etc. The quality of the estimate depends on the availability and accuracy of quantitative data at each of these steps. Characteristics of Project Finance

6. Finance for a Project in India can be raised by way of (A)       Share Capital (B)       Long‑term borrowings (C)       Short‑term borrowings Characteristics of Project Finance

7. The corporates are now allowed to raise resources for expansion plans by issuing equity shares with differential voting rights. The main advantages of such category of shares are : 1. Equity can be raised without diluting stake of the promoters. 2. Companies can reduce gearing‑ratios. 3. The risk of hostile‑takeovers is reduced to a considerable extent. 4. The passing of yield in the form of high dividends to the investors can be ensured Characteristics of Project Finance

8. Term finance is mainly provided by the various All India Development Banks (IDBI, IFCI, SIDBI, IIBI etc.), specialised financial institutions (RCTC, TDICI, TFCI) and investment institutions (LIC, UTI and GIC). In addition,  term finance is also provided by the State financial corporations, the State industrial development corporations and commercial banks. Debt instruments issued by companies are also subscribed for by mutual funds and financing activities are also done by finance companies. Characteristics of Project Finance

9. The institutions like LIC & GIC may not be very much associated with the project appraisal but lend their funds in consortium with other all India financial institutions. State level financial institutions consisting of : State Financial Corporations (SFCs). State Industrial Development Corporations (SIDCs). Regional Rural Banks & Co‑operative Banks. Characteristics of Project Finance

10. Before implementing a new project or undertaking expansion, diversification, modernisation or rehabilitation scheme ascertaining the cost of project and the means of finance is one of the most important considerations. For this purpose the Company has to prepare a feasibility study covering various aspects of a project including its cost and means of finance. It enables the Company to anticipate the problems likely to be encountered in the execution of the project and places it in a better position to respond to all the queries that may be raised by the financial institutionsand others concerned with the project. Characteristics of Project Finance

11. The cost of project will usually comprise of the following items: (i) Land and site development (ii) Factory building (iii) Plant and machinery. (iv) Escalation and contingencies (v) Other fixed assets or miscellaneous fixed assets. (vi) Technical know‑how (vii) Interest during construction. (viii) Preliminary and pre‑operative expenses. (ix) Margin money for working capital. Characteristics of Project Finance

12. Having established the total cost of project, promoters should work out the means of finance which will‑enable timely implementation of the project. Finance will ' be available from several sources and it is for the promoters to select the most suitable sources after taking into account all the relevant factors. Characteristics of Project Finance

13. The financial structure refers to the sources from which the funds for meeting the project cost can be obtained, as also the quantum which each source will contribute towards the project cost. For this purpose it would be advisable to keep in view the following aspects. (i)  The structure should be simple to operate in practice. (ii) The plan should have a practical bias and should serve as a working  guideline for all project forecasts. Characteristics of Project Finance

14. (iii) While deciding the structure, the environmental constraints should be kept in view. For example, the conditions prevailing in the capital market, future prospects for earnings, term‑lending institutional rules and policies in operation, government guidelines, etc. (iv) The financial structure should have an in‑built flexibility which can take care of circumstances not envisaged initially. Characteristics of Project Finance

15. In order to work out the capital structure it is necessary to prepare a financial plan. The methodology to be followed in working out a financial plan requires consideration, of the following important factors (1) Debt Equity gearing (2) Owned funds (3) Cost of capital (4) Availability of finance from various sources. Characteristics of Project Finance

16. For every category, of capital there is a distinct source of supply in the market. Therefore, it is necessary for the promoters to identify these sources so that they can be approached for finance at the appropriate time. A project will require two types of funds: ‑ one, to finance purchase of immovable assets such as land, buildings, plant and machinery, etc., and two, for carrying on day‑do‑day operations i.e working capital funds. Characteristics of Project Finance

17. The sources of working capital finance are mainly the following: Bank Finance Commercial Paper Fixed Deposits Inter‑corporate Deposits Characteristics of Project Finance

18. In consonance with the Government policy which encourages a new class of entrepreneurs and also intends wider dispersal of ownership and control of manufacturing units, a special scheme to supplement the resource & of an entrepreneur has been introduced by the Government. Assistance under this scheme is available in the nature of seed capital  which is normally given by way of long terminterest free loan. Seed capital assistance is provided to small as well as medium scale units promoted by eligible entrepreneurs. Characteristics of Project Finance

19. Subsidies extended by the Central as well as State Government form a very important type of funds available to a company for implementing its project. Subsidies may be available in the nature of outright cash grant or long‑term interest free loan. In fact, while finalising the mean of finance, Government subsidy forms an important source having a vital bearing on the implementation of many a project. Characteristics of Project Finance

20. Project Finance

21. We will cover Parties to a Project Financing, Necessary Contracts, Environmental Consideration, Political and Regulatory Background, Senior Debt – Banks, Insurance Companies, Public Markets; Mezzanine Debt; Equity - Financial Equity, Strategic Equity Project Finance

22. Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks or other lending institutions that provide loans to the operation. Parties

23. The loans are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modelling Parties

24. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms. Parties

25. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Parties

26. Parties

27. A project is established as a separate company A major proportion of the equity of the project company is provided by the project manager or sponsor, thereby tying the provision of finance to the management of the project Parties

28. The project company enters into comprehensive contractual arrangements with suppliers and customers The project company operates with a high ratio of debt to equity, with lenders having only limited recourse to the equity-holders in the event of default Parties

29. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound, or to assure the lenders of the sponsors' commitment. Project finance is often more complicated than alternative financing methods.  Parties

30. Insulation of sponsors Non-consolidation of project debt onto sponsor’s balance sheets Sharing of risk with others Sponsor’s ability to borrow limited by covenants – negative pledge Why Choose Project Finance

31. Insulation of sponsors Non-consolidation of project debt onto sponsor’s balance sheets Sharing of risk with others Sponsor’s ability to borrow limited by covenants – negative pledge Why Choose Project Finance

32. Sponsor engaging in multiple projects compelling need for external financing Multiple sponsors make sharing of risks extremely difficult, therefore SPV is an attractive option Tax advantages in some jurisdictions Jurisdiction may compel use of locally incorporated vehicle. Why Choose Project Finance

33. Project Company not to (Negative Covenants): Incur further financial indebtedness Create further security interests enter agreements unconnected to project lend money or make investments Parties

34. change accounting period pay dividends change its constitutional documents create subsidiaries Parties

35. often involved in aspects of project, including: Construction Operation/Maintenance Purchases of services or output Ownership of land Sponsors

36. Keep project on track - Meet regularly with project manager (weekly or bi-weekly) to review project timeline, key milestones and outstanding issues - Hold project manager accountable for meeting objectives, producing deliverables, conducing reviews, and communicating changes to all impacted areas - Share accountability for the project – when the project has problems, it’s not only the project manager who’s Sponsors

37. Be available - Be readily available and accessible for consultation with project manager - Act as an umbrella when roadblocks occur for project manager and team - prevent scope and schedule creep - Attend team meetings as needed to keep project on track Sponsors

38. Strategic Fit Assure Project is in line with the organization’s strategic goals - Confirm project direction and advocate for the project - Monitor political environment to help project adjust, if necessary Sponsors

39. Resources Provide or locate resources for the project - Aid the project manager in lining up, getting commitment from, and managing cross-functional support resource needs - Protect resources from getting pulled into other projects Sponsors

40. Project Finance Provide or locate funding for the project - Lead project budget creation and validation - Lead efforts to secure external funding (eg SGG) - Ensure project is tracking to budget. Review & approve monthly project finance reports. Escalate as needed. Sponsors

41. Help the project manager navigate the organization’s political environment - Officially affirm project manager - Provide official backing of the project - Communicate project closure and results to organization - Act as an escalation route for the project manager - Arbitrate and resolve conflict and interface problems that the project manager escalates Sponsors

42. Own the Final Product Be clear on what is expected in the end - Help define the scope, schedule and resource needs. Ensure project is delivering on outcomes, not just outputs - Validate all project phases with project manager - Sign off on charter and requirements documents Sponsors

43. Arranging banks Syndication Facility agent Technical bank Insurance bank Account bank Banks

44. Multilateral & Export Credit Agencies political risk insurance commercial risk insurance insurance again adverse currency movements interest rate support direct lending Banks

45. Turnkey contract Engineering design, procurement and construction Track record Project management Construction Company

46. Consultants/Professional Firms Insurance Environment Technical/Engineering Experts

47. Necessary Contracts

48. The typical project finance documentation can be of four main types Shareholder/sponsor documents Project documents Finance documents Other project documents Typical Documents

49. Engineering, Procurement and Construction Contract - (EPC Contract) Operation and Maintenance Agreement - (O&M Agreement) Concession Deed Shareholders Agreement - (SHA Agreement) Off-Take Agreement Documents

50. Supply Agreement Loan Agreement Intercreditor Agreement Tripartite Deed Common Terms Agreement Terms Sheet Documents