Project finance market and structuring

Abstract

Project financing is an attractive long term financing alternative enabling project sponsors to shed risks to the banks or capital debt markets. It is finance for a particular project mainly infrastructure and industrial projects those have long gestation and payback period. One of the early projects with project financing was development of the Panama Canal in early 20th century. However the concepts of creating Special Purpose Vehicle (SPV) for the execution of high-risk projects originated with the development of North Sea oil fields in the 1970s and 1980s. The other way of accomplishing such projects was either through government intervention or using traditional corporate finance. Therefore project financing is sometimes called off-balance sheet financing. Today project finance can be defined as: “Financing of an infrastructure (or industrial) project with large capital needs, usually based on non-recourse or limited recourse structures, where debt is paid back from the cash flow generated by the project, with the project's assets, rights and interests held as collateral.” Therefore, terms of the debt and equity securities are tailored to the cash flow characteristics of the project. Projects having large and reliable cash flows get higher rating than projects with little and inconsistent cash flows. In this situation, the credit risk associated with the borrower (company) is not as important as in a corporate loan; what are most important are the identification, analysis, allocation and management of every risk associated with the project. The popular examples of project financing include construction of power plants, pipelines, Refineries, transportation, mining facilities, toll road, mineral processing facilities, hydroelectric projects, dock facilities, industrial facilities and heavy manufacturing plants. In recent years, project financing have become increasingly common way of funding the public utilities projects especially in developing and Middle East countries. The purpose of this paper is to explain global and Indian financial market for project financing and project finance structuring. The first section of the report compares project financing with traditional corporate financing followed by a description of different forms of project financing and associated risks with each type. Various key concepts of project financing are discussed in the second section followed by the global and Indian market for project financing in third section. Project finance structuring is explained and analyzed empirically in the next sections. The analysis has been done on the data collected from the key project from India and worldwide. Finally, we conclude with the future perspective of project financing.