In this module we learnt the difference between Project finance and Corporate Finance. We saw how Project finance mechanism has evolved. Project finance is ideal for large infrastructure projects with substantial upfront outlays and revenue spread over long periods. Project Finance is taken for a specific project and a special purpose vehicle is formed to execute the project. This SPV demises at the end of the project life. (for example, at the end of the concession period, the assets of a BOT toll road will be handed over to the government and the SPV will cease to exist). Project Finance has no recourse or limited recourse to the project sponsors; only their equity investment in the project company or SPV is at stake. On the other hand, corporate finance is taken on the balance sheet of the sponsors. As the majority of risks are covered through various contracts entered into by the SPV such as Power Purchase Agreement, Fuel supply agreement, EPC contract for construction etc., the lenders are willing to finance the project at a much higher Debt/Equity ratio than they would do so in case of corporate finance. Also, being a separate company, the lenders can have easy oversight on the finances of the company and protect themselves through agreements / escrow accounts on the revenues of the project company. We also saw the global shift of the project finance mechanism from the developed countries to Asia and saw that State Bank of India has now emerged as the top global arranger of debt for Project companies. The use of Tax free bonds (NHAI) as well a tax savings bonds (SBI) were also discussed and we saw the high returns that accrue to the bond holder because of these tax sops.
Adding to Aravindan sir’s thoughts, I would like to focus on the key differences between corporate finance and project finance. The major differences are: 1. Unlike in corporate finance where the borrower’s existing assets are placed as collateral, in project finance type of structure the proposed project’s assets are placed as collateral. This implies that the lenders have limited recourse or no-recourse on the sponsors existing balance sheet 2. Loan sanction for any corporate company is based on its financial statements and profitability. In project finance, the loan commitment is explicitly based on the future cash flows of the project being appraised 3. In corporate finance kind of structure, the debt-to-equity ratio is low when compared to project finance kind of structure and this can be attributed to the fact that higher debt effects the company’s credit rating (investment grade rating) and high leverage is riskier hence a rational investor will not be interested in buying shares of such company. But in case of project finance as all the potential risks are mitigated through appropriate contracts i.e., EPC contract for construction, O&M contract for maintenance etc., the possibility of debt financing (high initial capital is essential) in project finance is higher as the very type of structure provides the necessary comfort to the lenders in providing so 4. Compared to corporate finance, the financial closure of the project finance kind of structure generally consumes significant cost and time 5. Another difference between corporate finance and project finance surrounds the frequency in which companies turn to either option. This decision can be highly dependent on regional preferences driven by laws and the economic environment that is most prevalent in a nation. Factors such as whether an economy is developed or emerging might similarly drive a decision about which type of financing is most efficient and practical
The first module started with some basic introduction to the infrastructure as well as finance where important terms and definitions related to finance were learnt. The film screened showed the importance of looking at a case from the perspective of all different stakeholders. As Mr. Aravindan and Sandeep has posted, the benefits and dis-benefits of project finance when compared to corporate finance were discussed. Since all major points were stated, I don’t want to repeat the same. In addition to these, how SBI emerged as leader in financing infrastructure projects over the recent period is seen, which in fact is quite interesting as this shows the efforts that developing countries are putting towards infrastructure. Later, tax savings, tax free bonds and capital gain markets are seen along with the IRR’s that are obtained from these benefits. For me, the major key take away points from this module are the definitions learnt that are related to finance and the importance of project finance for the infrastructure projects.
CE11B045 Corporate finance is the traditional mode of financing wherein the sources of funding are Debt and Equity. Generally, a project is funded by a mixture of debt and equity, the debt to equity ratio chosen carefully so as not to jeopardize the credit rating and share value of the company. The Debt holders get returns through the interests paid to them and the share-holders get returns through dividends and share appreciation. In the recent past, the financial world has seen the evolution of project finance. This popular option has been in demand in India as well. Delhi airport and Hyderabad airport are few examples of mega projects executed on the project finance mode which provides transparency and reduced project risk through improved strength of contract. Because of its non-recourse nature, project finance is used mostly in risky countries, South Asia being the largest to attract PF lending while the US borrowers account for the least PF lending. Compared to syndicated loans, project finance loans pay more fees to banks in the form of Commitment fee and participation fee. Also, the loan spreads for PF loans are lower. Studies have shown (Project finance and investments in risky environments: evidence from the infrastructure sector, Journal of Financial Management of Property and Construction) that project finance has helped bridge the finance deficit in the infrastructure sector to promote economic development in developing countries.
ce11b072 In this course we focused on physical infrastructure and different ways of financing it. There are two alternatives for a sponsor to finance a project: 1. Corporate financing – project is financed on balance sheet. 2. Project financing – SPV is formed and financed off balance sheet. Each of these alternatives has its own advantages. In the past few decades sponsors have been showing interest in project finance for financing projects. The main reason for this new interest can be recent large scale privatizations and need of private sector investments. Project finance helps finance new investment by structuring financing with the project’s own assets and cash flows. This alternative is able to alleviate investment risk and increase the availability of finance. Disadvantage of the second alternative is it involves high cost for structuring and organizing compared to corporate financing and parent company loses its flexibility in terms of using its resources among the different projects. So sponsor should carefully weigh the advantages of each alternative before choosing one of these. Projects are financed by raising equity and debt. Equity can be raised by Retained Earnings and Equity Issuances. Debt can be raised from bank loans, bonds, multilateral agencies and insurance companies. Other key learnings from this module are calculating financial ratios, IRR, cost of debt and equity and usage of these concepts in evaluation of projects.
Adding to what Pooja said, and referring to the same paper shown (Project finance and investments in risky environments: evidence from the infrastructure sector, Journal of Financial Management of Property and Construction), Project finance has helped in attracting foreign investment in developing countries. The number of banks involved in syndication especially when the project was structured as project finance was higher in developing countries, which further support the fact that project finance is the preferred option by investors in developing countries, the comparison of means and regression analysis done in the paper justify the above mentioned points.
Adding to what Aravindan Sir said, Tax free bonds are preferred by pensioners who are spread across and Tax saving bonds are for High income people in metro areas because the gain is significant only if one belongs to highest tax bracket. Capital Gain Bonds were also discussed in class. The government came out with this bonds to give incentive so that people show their transactions fairly who were otherwise finding ways to avoid paying tax on the gain obtained by selling any asset.
CE11B071 Summary to module 1 The course started with our first module of introduction to infrastructure finance. The main sources of funding are equity and debt. We learnt the types of financing broadly corporate finance and project finance. Corporate finance being financing based on the assets of the borrower and the balance sheet of the sponsor. Project finance is a unique method of financing a project based on the projects assets and its potential project cash flows. In project finance the sponsoring firm and the project company act as two separate entities, even if the project is unsuccessful the creditors will not have any claims on the firm’s assets and cash flows. The project company is called a Special Purpose vehicle and this type of financing is also called nonrecourse financing as the project company’s assets only are considered for financing. Project finance can support a high debt to equity ratio, few drawbacks of this type of financing are that it is costlier than corporate finance, cost is higher due to expertise needed in structuring, organizing and monitoring the project, lenders place a higher interest rate and time to evaluate , negotiate and execute is longer. We have also learnt about types of investors- shareholders and debt holders. This module introduced many financial terms and tools, financial closure, syndicated loans, escrow account, covenants, tax bracket, capital gain bonds etc. to name a few giving an overview of project finance and differentiating with corporate finance.
In this introductory module, we were exposed to how infrastructure is financed and how to evaluate them. Thus we started with IRR and NPV calculations and used several deposit schemes offered by banks, infrastructure companies etc. in India to calculate the IRRs.
We also learnt about how there are two major ways of financing Infrastructure- Corporate Financing and Project Financing. We learnt how Project Finance (PF) differs from Corporate Finance and how PF is being used more and more in developing countries. In fact, State Bnak of India has become the largest loan provider in Project Finance. The popularity of Project Finance is because of several reasons such as ability to raise high levels of debt, limited or no recourse loans thus insulating the project sponsor from downside risks pertaining to the project, extensive contractual arrangements that strengthen the project and minimises risks, transparency which it is able to offer to all stakeholders thus increasing their confidence etc.
We also see in the journal articles that Project Finance helps in increasing infrastructure investments, how project finance is different from other syndicate credits, the returns seen on project financed investments, the characteristics of project finance etc.
Project Finance unlike Corporate Finance is limited recourse funding ie is associated only with the project and has nothing to do with the parent company. This innovation in funding has indeed been a boon to the infrastructure industry, where numerous companies come together, pool in their expertise and form an SPV to usually run the project as a new company. Such endeavors are usually outside the conventional interests of most companies and Project Finance help these projects to be funded as it is easy to manage in cases of consortiums or SPVs. One interesting difference that I noted between Corporate and Project models of financing projects is that, the CF model is looking on the history/ balance sheet of the company, whereas the PF model tries to look into the future by judging a project based on expected cash flows and contractual agreements. The opportunity of project financing, with higher D/E ratio can increase competition in the sector as companies with small balance sheets but with capacity to model a good project can compete at par with large players. This increasing competition in market can increase the net value to customers. For the banks the stricter and transparent norms of a project finance model make it comparatively safer to fund an investment rather than judging a project solely based on capacity of parent company. Project Finance is surely a good option for complex projects with high return rates. This involves higher participation from the investors and all these multiple levels of project scrutiny can help in evaluating the risks better. The only issue is that the terms are strict and legally abiding for the sake of increasing transparency, making the procedure much more complex. The key issue is to safely handle this structuring part of the project and once this can be done effectively, and it is a tricky business to get everything in line within the stipulated time. The calculations to obtain true returns based on tax savings, from standard investment options was interesting. It was interesting to note that same investment plans can be differently attractive to people depending on their age, wealth and tax segment.
From the very first lecture, the takeaways from this course , as to what project finance is : • The debt and equity components of financing the project and ratios in which each component needs to be there. • The corporate finance model where the recourse to the Company cash flows is important than the project performance. • The project finance concept where a special purpose vehicle is created only for the purpose of that particular project that takes care of its financing aspect by itself without involvement from the parent company and the stakeholders having recourse only to the project cash flows. • The huge opportunity the project finance concept creates for the small companies • The transparency in the project finance method that takes too many questions from the bankers and the large amount of contractual work to be done with the bankers/lenders
MS15D002 M R Aravindan
ReplyDeleteIn this module we learnt the difference between Project finance and Corporate Finance. We saw how Project finance mechanism has evolved.
Project finance is ideal for large infrastructure projects with substantial upfront outlays and revenue spread over long periods. Project Finance is taken for a specific project and a special purpose vehicle is formed to execute the project. This SPV demises at the end of the project life. (for example, at the end of the concession period, the assets of a BOT toll road will be handed over to the government and the SPV will cease to exist). Project Finance has no recourse or limited recourse to the project sponsors; only their equity investment in the project company or SPV is at stake. On the other hand, corporate finance is taken on the balance sheet of the sponsors.
As the majority of risks are covered through various contracts entered into by the SPV such as Power Purchase Agreement, Fuel supply agreement, EPC contract for construction etc., the lenders are willing to finance the project at a much higher Debt/Equity ratio than they would do so in case of corporate finance. Also, being a separate company, the lenders can have easy oversight on the finances of the company and protect themselves through agreements / escrow accounts on the revenues of the project company.
We also saw the global shift of the project finance mechanism from the developed countries to Asia and saw that State Bank of India has now emerged as the top global arranger of debt for Project companies.
The use of Tax free bonds (NHAI) as well a tax savings bonds (SBI) were also discussed and we saw the high returns that accrue to the bond holder because of these tax sops.
MS15F007 - Philip Baumgärtner
ReplyDeletePlease see the Email I sent, when the blog was not yet online.
CE11B096 Y V Sandeep
ReplyDeleteAdding to Aravindan sir’s thoughts, I would like to focus on the key differences between corporate finance and project finance.
The major differences are:
1. Unlike in corporate finance where the borrower’s existing assets are placed as collateral, in project finance type of structure the proposed project’s assets are placed as collateral. This implies that the lenders have limited recourse or no-recourse on the sponsors existing balance sheet
2. Loan sanction for any corporate company is based on its financial statements and profitability. In project finance, the loan commitment is explicitly based on the future cash flows of the project being appraised
3. In corporate finance kind of structure, the debt-to-equity ratio is low when compared to project finance kind of structure and this can be attributed to the fact that higher debt effects the company’s credit rating (investment grade rating) and high leverage is riskier hence a rational investor will not be interested in buying shares of such company. But in case of project finance as all the potential risks are mitigated through appropriate contracts i.e., EPC contract for construction, O&M contract for maintenance etc., the possibility of debt financing (high initial capital is essential) in project finance is higher as the very type of structure provides the necessary comfort to the lenders in providing so
4. Compared to corporate finance, the financial closure of the project finance kind of structure generally consumes significant cost and time
5. Another difference between corporate finance and project finance surrounds the frequency in which companies turn to either option. This decision can be highly dependent on regional preferences driven by laws and the economic environment that is most prevalent in a nation. Factors such as whether an economy is developed or emerging might similarly drive a decision about which type of financing is most efficient and practical
CE11B070 B. Pavan Kumar
ReplyDeleteThe first module started with some basic introduction to the infrastructure as well as finance where important terms and definitions related to finance were learnt. The film screened showed the importance of looking at a case from the perspective of all different stakeholders. As Mr. Aravindan and Sandeep has posted, the benefits and dis-benefits of project finance when compared to corporate finance were discussed. Since all major points were stated, I don’t want to repeat the same. In addition to these, how SBI emerged as leader in financing infrastructure projects over the recent period is seen, which in fact is quite interesting as this shows the efforts that developing countries are putting towards infrastructure. Later, tax savings, tax free bonds and capital gain markets are seen along with the IRR’s that are obtained from these benefits. For me, the major key take away points from this module are the definitions learnt that are related to finance and the importance of project finance for the infrastructure projects.
CE11B045
ReplyDeleteCorporate finance is the traditional mode of financing wherein the sources of funding are Debt and Equity. Generally, a project is funded by a mixture of debt and equity, the debt to equity ratio chosen carefully so as not to jeopardize the credit rating and share value of the company. The Debt holders get returns through the interests paid to them and the share-holders get returns through dividends and share appreciation.
In the recent past, the financial world has seen the evolution of project finance. This popular option has been in demand in India as well. Delhi airport and Hyderabad airport are few examples of mega projects executed on the project finance mode which provides transparency and reduced project risk through improved strength of contract. Because of its non-recourse nature, project finance is used mostly in risky countries, South Asia being the largest to attract PF lending while the US borrowers account for the least PF lending.
Compared to syndicated loans, project finance loans pay more fees to banks in the form of Commitment fee and participation fee. Also, the loan spreads for PF loans are lower. Studies have shown (Project finance and investments in risky environments: evidence from the infrastructure sector, Journal of Financial Management of Property and Construction) that project finance has helped bridge the finance deficit in the infrastructure sector to promote economic development in developing countries.
This comment has been removed by the author.
ReplyDeletece11b072
ReplyDeleteIn this course we focused on physical infrastructure and different ways of financing it. There are two alternatives for a sponsor to finance a project: 1. Corporate financing – project is financed on balance sheet. 2. Project financing – SPV is formed and financed off balance sheet. Each of these alternatives has its own advantages. In the past few decades sponsors have been showing interest in project finance for financing projects. The main reason for this new interest can be recent large scale privatizations and need of private sector investments. Project finance helps finance new investment by structuring financing with the project’s own assets and cash flows. This alternative is able to alleviate investment risk and increase the availability of finance. Disadvantage of the second alternative is it involves high cost for structuring and organizing compared to corporate financing and parent company loses its flexibility in terms of using its resources among the different projects. So sponsor should carefully weigh the advantages of each alternative before choosing one of these.
Projects are financed by raising equity and debt. Equity can be raised by Retained Earnings and Equity Issuances. Debt can be raised from bank loans, bonds, multilateral agencies and insurance companies.
Other key learnings from this module are calculating financial ratios, IRR, cost of debt and equity and usage of these concepts in evaluation of projects.
CE11B074, Harishchandra Meena
ReplyDeleteAdding to what Pooja said, and referring to the same paper shown (Project finance and investments in risky environments: evidence from the infrastructure sector, Journal of Financial Management of Property and Construction), Project finance has helped in attracting foreign investment in developing countries. The number of banks involved in syndication especially when the project was structured as project finance was higher in developing countries, which further support the fact that project finance is the preferred option by investors in developing countries, the comparison of means and regression analysis done in the paper justify the above mentioned points.
Adding to what Aravindan Sir said, Tax free bonds are preferred by pensioners who are spread across and Tax saving bonds are for High income people in metro areas because the gain is significant only if one belongs to highest tax bracket. Capital Gain Bonds were also discussed in class. The government came out with this bonds to give incentive so that people show their transactions fairly who were otherwise finding ways to avoid paying tax on the gain obtained by selling any asset.
This comment has been removed by the author.
ReplyDeleteCE11B071
ReplyDeleteSummary to module 1
The course started with our first module of introduction to infrastructure finance. The main sources of funding are equity and debt. We learnt the types of financing broadly corporate finance and project finance. Corporate finance being financing based on the assets of the borrower and the balance sheet of the sponsor. Project finance is a unique method of financing a project based on the projects assets and its potential project cash flows. In project finance the sponsoring firm and the project company act as two separate entities, even if the project is unsuccessful the creditors will not have any claims on the firm’s assets and cash flows. The project company is called a Special Purpose vehicle and this type of financing is also called nonrecourse financing as the project company’s assets only are considered for financing. Project finance can support a high debt to equity ratio, few drawbacks of this type of financing are that it is costlier than corporate finance, cost is higher due to expertise needed in structuring, organizing and monitoring the project, lenders place a higher interest rate and time to evaluate , negotiate and execute is longer. We have also learnt about types of investors- shareholders and debt holders. This module introduced many financial terms and tools, financial closure, syndicated loans, escrow account, covenants, tax bracket, capital gain bonds etc. to name a few giving an overview of project finance and differentiating with corporate finance.
Zubin Nayak MS14S018
ReplyDeleteIn this introductory module, we were exposed to how infrastructure is financed and how to evaluate them. Thus we started with IRR and NPV calculations and used several deposit schemes offered by banks, infrastructure companies etc. in India to calculate the IRRs.
We also learnt about how there are two major ways of financing Infrastructure- Corporate Financing and Project Financing. We learnt how Project Finance (PF) differs from Corporate Finance and how PF is being used more and more in developing countries. In fact, State Bnak of India has become the largest loan provider in Project Finance. The popularity of Project Finance is because of several reasons such as ability to raise high levels of debt, limited or no recourse loans thus insulating the project sponsor from downside risks pertaining to the project, extensive contractual arrangements that strengthen the project and minimises risks, transparency which it is able to offer to all stakeholders thus increasing their confidence etc.
We also see in the journal articles that Project Finance helps in increasing infrastructure investments, how project finance is different from other syndicate credits, the returns seen on project financed investments, the characteristics of project finance etc.
Project Finance unlike Corporate Finance is limited recourse funding ie is associated only with the project and has nothing to do with the parent company. This innovation in funding has indeed been a boon to the infrastructure industry, where numerous companies come together, pool in their expertise and form an SPV to usually run the project as a new company. Such endeavors are usually outside the conventional interests of most companies and Project Finance help these projects to be funded as it is easy to manage in cases of consortiums or SPVs. One interesting difference that I noted between Corporate and Project models of financing projects is that, the CF model is looking on the history/ balance sheet of the company, whereas the PF model tries to look into the future by judging a project based on expected cash flows and contractual agreements. The opportunity of project financing, with higher D/E ratio can increase competition in the sector as companies with small balance sheets but with capacity to model a good project can compete at par with large players. This increasing competition in market can increase the net value to customers. For the banks the stricter and transparent norms of a project finance model make it comparatively safer to fund an investment rather than judging a project solely based on capacity of parent company.
ReplyDeleteProject Finance is surely a good option for complex projects with high return rates. This involves higher participation from the investors and all these multiple levels of project scrutiny can help in evaluating the risks better. The only issue is that the terms are strict and legally abiding for the sake of increasing transparency, making the procedure much more complex. The key issue is to safely handle this structuring part of the project and once this can be done effectively, and it is a tricky business to get everything in line within the stipulated time.
The calculations to obtain true returns based on tax savings, from standard investment options was interesting. It was interesting to note that same investment plans can be differently attractive to people depending on their age, wealth and tax segment.
From the very first lecture, the takeaways from this course , as to what project finance is :
ReplyDelete• The debt and equity components of financing the project and ratios in which each component needs to be there.
• The corporate finance model where the recourse to the Company cash flows is important than the project performance.
• The project finance concept where a special purpose vehicle is created only for the purpose of that particular project that takes care of its financing aspect by itself without involvement from the parent company and the stakeholders having recourse only to the project cash flows.
• The huge opportunity the project finance concept creates for the small companies
• The transparency in the project finance method that takes too many questions from the bankers and the large amount of contractual work to be done with the bankers/lenders