Intern’s Details

Name Ronak Jain

Smart Task No. 1

Project Topic Project finance

Smart Task (Solutions’)

Task Q1: What is Finance? How Finance is different from Accounting? What are important basic
points that should be learned to pursue a career in finance?

Task Q1 Solution :

Finance is the basic of business. It is required to purchase assets, goods, raw material and for the other
flow of economic activities. Finance can be defined as “The provision of money at the time when it is
needed by a business”. Finance is the study of money and capital markets which deals with many of the
topics covered in macro economics.

It is the management and control of assets and investments, which focuses on the decisions of
individual, financial and other institutions as they choose securities for their investments portfolios.
Also, managerial finance involves the actual management of the firm, as well as profiling and managing
project risks.

The difference between finance and accounting is that –

1. Finance, is the efficient and productive management of assets and liabilities based on existing
information. On the other hand, Accounting is the practice of preparing accounting records,
including measuring, preparation, analyzing, and the interpretation of financial statements. These
records are used to develop and provide data measuring the performance of the firm, assessing its
financial position, and paying taxes.

2. Finance is a broader term for the management of assets and liabilities and the planning of future
growth, whereas accounting focuses on day-to-day flow of money in and out of a company and
institution,

3. The aim of finance includes decision making, strategy, managing & controlling. The aim of
accounting is to collect and present the financial information for both internal and external purpose.

Within finance, one can find a variety of job roles that are not limited to just the accounting field.

You can explore financial career options in various industries such as financial service, financial
planning, fund management, regulatory compliance, trading, financial management, and so on.
The important basic points to be learned to pursue a career in finance are as follows-

1. Understanding the importance of cash.

2. One should be quickly analytical and have the ability to understand the concept and practices of
finance.
3. One should learn to keep an update of market knowledge like knowledge of interest rates,
inflation, tax rates etc…
4. One should have ability to manage his own money and understands the value of money
according to current economical situation.
5. One should develop the ability of risk taking as higher the ability to take risk is considered as
higher the ability to earn high profit. Finance is all about risk taking.
6. One should learn the concept of return.

500 Words (Max)

Task Q2: What is project finance? How is project finance different from corporate finance? Why
can’t we put project finance under corporate finance?

Task Q2 Solution :

Project Financing is a long-term, zero or limited recourse financing solution that is available to a borrower
against the rights, assets, and interests related to the concerned project.

In other words, “Project finance involves a corporate sponsor investing in and owing a single purpose,
industrial asset through a legally independent entity financed with non-recourse debt”.

Project financing incorporates-

 Financing of long-term infrastructure, industrial projects, and public services.

 Non-recourse/limited recourse financial structure.
 Payment from cash flow generated by the project.

Methods of the Project Financing.

There are three methods in Project Financing-
1. Cost Share Financing or Low interest loan financing.
2. Debts Financing.
3. Equity Financing.
Project finance is different from corporate finance in the following ways-

BASIS PROJECT FINANCE CORPORATE FINANCE

 Financers look at cash flow  Financers look to the overall strength

Financing of single assets (the project) of a company’s balance sheet and
for repayment. projections, which is usually derived
not from a single assets but a range of
assets and business.

 No/limited recourse to  All assets of the company can be used

outside support for project for security.
Security finance debt.  Access to entire cash flow from various
 Project contractors are spread of business as security, thus
usually the main security for even if project fails, corporate lenders
lenders; project company’s can be repaid.
assets are likely to be worth
much less than debt during
construction.

 Project often has a finite life  Company assumed to remain I a

Duration as such the debt must be business for a indefinite period and
repaid by or before the end of losses can be rolled over.
this life

 Lenders exercise close  Leaves management of the company to

Control control over activities of run business as they see fit.
project company to ensure
value of project is not
jeopardized

In corporate financing, capital is been procured by demonstrating lenders balance sheets as collateral to be
used in case of default, the lender can foreclose on sponsor company assets, sell them and use proceeds in
order to recover their investment.

Whereas, in Project finance repayment is not based on sponsoring company’s assets or balance sheet, but
on the basis of revenues that the project will generate once it is completed. Corporate finance cannot
demonstrate that revenue stream from completed project will be sufficient to repay the loan that’s
why it can’t put Project finance under corporate finance.

500 Words (Max)

Task Q3: Define 20 terminologies related to project finance.

Task Q3 Solution :

The 20 terminologies related to project finance are as follows-

1. Project sponsor- Whole idea of project comes from them; they are the investor of money into the
project who may be an existing company, a developer, or a government institution or agency.

2. SPV-special-purpose vehicle (SPV) is a single-asset legal entity that is created for the sole and
exclusive purpose of acting as the project owner in a project financing. Special-Purpose Entities are
created by the project sponsor to shield the parent companies from financial risk.

3. Non-recourse finance-Non-recourse finance is a type of commercial lending that entitles the

lender to repayment only from the profits of the project the loan is funding and not from any other
assets of the borrower. In case of default, the lender may not seize any assets of the borrower
beyond the collateral.

4. Capital intensive- Project finance is raising capital for huge amount of investment for completion
of project.

5. Common equity- It represents ownership of the project. The sponsors usually hold a significant
Portion of the equity in the project.

6. Repayment schedule- It sets out how the principal debt will be repaid – on either a “Straight
Line” or a “balloon” basis (when it is repaid at the end of the project).

7. Securitization -Is the financial practice of pooling various types of contractual debt such as
residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling
their related cash flows to third party investors as securities, which may be described as bonds.

8. Default-When a covenant has been broken or an adverse event has occurred. A money default
occurs when a repayment was not made on time. A technical default means a project parameter is
outside defined or agreed limits, or a legal matter is not yet resolved.

9. Financing agreements- The documents which provide the project financing and sponsor support
for the project as defined in the project contracts.

10. Sensitivity- An analysis of how changing an input variable in financial model affects the value,
performance or solvency of a given project.

11. Off take agreement- It is the agreement between the project company and off taker (the one who
is buying the product/services that the project produces/delivers).
 12. Leverage- The level of debt expressed as a percentage of equity or as a ratio to equity. Typically,
finance cost is 70% debt and 30% equity. Therefore, project finance is highly leveraged
transaction.

13. Financial model- A financial model is constructed by the sponsor as a tool to conduct negotiations
with the investor and prepare a project appraisal report.

14. Growth capex- It is a form of capital expenditure undertaken by a company to expand existing
operations or further growth prospects. It focuses on activities such as the acquisition of fixed
assets, purchase of hardware, vehicles for transporting goods, and building expansion.

15. Contingency- An additional amount or percentage to any cash flow item needed to provide a
cushion.

16. Merchant bank- It is a firm or financial institutions that invests equity capital directly in
businesses and often provides them advisory services.

17. Mezzanine Financing- it is mixture of financing instruments, with characteristics of both debt and
equity, providing further debt contributions through higher-risk, higher-return instruments,
subordinated debt, sometimes treated as equity.

18. Amortization- it is the reduction of the capital balance or up-front (capitalized) expenses over time
to reflect life-cycle depreciation and obsolescence, often an equal amount per annum.

19. Debt service coverage ratio-this is usually a historical test which compares the amount by which
the net cash flow for a given period, usually 12 months, has gone over the debt service requirement
(principal amount plus interest).

20. Operating risk- Cost, technology, and management components which impact opex and project
output/throughput. Costs include inflation.
500 Words (Max)

Task Q4: What are non-recourse debt / loan? What is mezzanine finance explained with an example.

Task Q4 Solution :

Non-Recourse debt is a loan that is secured by given collateral. This debt instrument is typically backed by
an asset, frequently a real estate property. Nevertheless, financial assets, machinery and other equipments
can be used as collateral for non-recourse loans. A non-recourse loan, more broadly, is any consumer or
commercial debt that is secured only by collateral. In case of default, the lender may not seize any assets of
the borrower beyond the collateral. Non-recourse loans are often used to finance commercial real estate
ventures and other projects that involve a long lead time to completion. In the case of real estate, the land
provides the collateral for the loan.
Mortgages are common examples of non-recourse debts. In order to protect themselves, lenders
normally finance less than 80% of the commercial value of the property.

Mezzanine debt gets its name because it blurs the line between what constitutes debt and equity.

It is highest risk form of debt, but it offers some of the highest returns- a typical rate is in the range of 12%
to 20% per year. A mezzanine lender is generally brought into a buy out to display some of the capital that
would as it usually be invested by an equity investor.

Mezzanine loans are a hybrid of both debt and equity. Depending on the terms of the agreement and how
events unfold, the arrangement can provide an equity interest to lenders.

Mezzanine lenders usually work with companies that have a successful track record. For example, you
might use a mezzanine loan to acquire an existing business or expand operations for a business that’s
already profitable.

In short,

 A mezzanine loan is a form of financing that blends debt and equity.

 Lenders provide subordinated loans (less-senior than traditional loans), and they potentially receive
equity interests as well.
 Mezzanine loans typically have relatively high-interest rates and flexible repayment terms.
 Mezzanine debt typically has a lower priority than senior debts when borrowers go bankrupt.
 Depending on the conditions of the loan, lenders may be able to set conditions of business
operations or receive a share in equity if the borrower goes into default.

Mezzanine funds can be used for buying a company or for expanding one’s own business without going
for an IPO.

Let’s say that Mr. Richard has an ice-cream parlor. He wants to expand his business. But he doesn’t want
to go for the conventional equity financing. Rather he decides to go for mezzanine financing. He goes to
mezzanine financiers and asks for mezzanine loans. The lenders mention that they need warrants or
options for the mezzanine loans. Since the loans are unsecured, Mr. Richard has to agree to the terms set
by the mezzanine lenders. So Mr. Richard takes $100,000 by showing that he has a cash flow of $60,000
every year. He takes the loans and unfortunately defaults at the time of payment since his ice-cream parlor
couldn’t generate enough cash flow. The lenders take a portion of his ice-cream parlor and sell off to get
back their money. As we see from above, Federal Capital Partners (a Private Equity firm) has provided
$6.5 million in the mezzanine fund to The Altman Companies for the development of Altis Grand Central.

500 Words (Max)

Task Q5: Explain in detail with reasons of what the sectors are or which types of projects are suitable for
project finance?

Task Q5 Solution :

Project financing is financing of long-term infrastructure, industrial projects, and public services.
Project finance is generally used in oil extraction, power production, and infrastructure sectors.
These are the most appropriate sectors for developing this structured financing technique, as they have low
technological risk, a reasonably predictable market, and the possibility of selling to a single buyer or a few
large buyers based on multi-year contracts (e.g. Take-or-pay contracts). Project finance structures usually
involve a number of equity investors as well as a syndicate of banks who will provide loans to the project.

The most common structure for project finance are as-

1. A joint venture or other similar other unincorporated association.

2. A partnership.
3. A limited partnership.
4. An incorporated body, such as limited company (probably the most common).
Of these, joint venture and limited company structure are most universally used.

The types of project for which project finance is suitable for are-

i. infrastructure projects, such as government buildings and transport systems;

ii. oil and gas exploration projects;
iii. sports stadia; and
iv. Liquefied natural gas development projects.
v. Mining
vi. Building
vii. Construction
viii. Real estate

500 Words (Max)