Intern’s Details
Name Kinal Rajpura
Email-ID [Link].fms19@[Link]
Smart Task 1
No.
Project Topic Project finance – Modelling and Analysis
Smart Task (Solution)
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 :
1. Finance:
Finance is term related to management of asset and liabilities by doing activity like
investing, banking, leveraging, creating of financial system.
2. Accounting aims keeping record of day to day transaction and events of
business systematically for taxation purpose, while finance considers the aspects of
optimum allocation of available resources & funds and debt management.
Accounting has backward view point i.e. it records only those transaction which
had been done in past, on the other hand Finance has forward looking view point, it
gives insight of future events and analyse them for business purpose.
3. Basic points that should be learned to pursue a career in finance are like…
Knowledge of IFRS accounting,
Various concepts and terminology of finance,
Knowledge of current economy at macro and micro level and quantitative
techniques,
Making financial reports,
Knowledge of MS Excel,
Ability to build relationship,
Problem solving skills,
Project management skills.
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 :
1. Project finance refers to take financial decision for a particular project. Project
finance is funding of long-term projects like infrastructure, heavy and capital
intensive public services and industrial project using cash flow of project rather than
the balance sheet of sponsor company. Here non-recourse loans are secured by
project asset and paid entirely by Project cash flow.
2. Difference
• Project finance is non-recourse while in corporate finance lenders may claim
to the asset of entire company as repayment of their loan.
• Project finance has no terminal value.
• project finance includes high transactional cost due to documentation and
longer gestation period and cost of capital so it's not suitable for small project
• In corporate finance, capital investment decision are opaque to creditors but
in project finance, these decisions are highly transparent.
3. There is risk in project finance, means if project becomes default, sponsoring
Company is not liable to pay to lenders from own assets. While in corporate finance,
lender has claim on other project’s cash flow. There is much more due diligence in
project financing than corporate financing. So, we can’t put project finance under
corporate finance.
Task Q3: Define 20 terminologies related to project finance.
Task Q3 Solution
1. Amortisation: Amortization is reduction of capital balance by equal amount
or paying off debt by regular payment per annum.
2. Special purpose vehicle: A separate legal entity act as parent company
which is created for lawful and specific purpose in context of raising funds,
managing financial risk.
3. Collateral: collateral means an asset kept as security under a loan or other
financial instrument, if repayment is not done or in case of default, collateral
asset will be forfeited.
4. Non-recourse finance: It is a loan where lender is only bound to repay loan
from cash generated from that project, not from own assets.
5. Cross default: provision in which borrower having multiple debts default on
one of the debt results in automatic default of another debt.
6. Commercial risk: commercial or business risk is to offer credit without any
collateral. In other words it includes all the risk excluding political risk
7. Concession agreement: An Agreement between project company and
public entity that gives right the company to use government assets or
operate business within govt. jurisdiction for specified time period.
8. Creditworthy: A company which is credit worthy has very low chance to be
default in its due payment or debt.
9. Defects liability: In context of construction contractor, liability of contractor
to repair the damages even after completion of construction
10. Escrow: the deed or document is signed but kept in custody of third party
until specific condition or stated event will happens.
11. Expropriation: act of state govt. taking money or property from its owner to
use it for public.
12. Hurdle rate: It is a lowest acceptable rate of return for an investment.
13. Internal rate of return: IRR is a rate at which NPV of project becomes zero
worth.
14. Lien: lien is the right to keep the property of other to secure the debt owed.
15. Liquidity: liquidity means ability of an asset to be easily converted into ready
cash.
16. Net present value: the discounted value of an investment cash inflows
minus the discounted value of its cash outflows.
17. Off-balance sheet Liabilities: liabilities or obligation which are not
mentioned in liability side of balance sheet. E.g. lease obligation
18. Offtake: project output or final product produced by project
19. Performance bond: A bond that provides guarantee of successful
completion of project, issued by a bank or other financial institution.
20. Syndication: selling or transferring something to a group of prospective
participants.
Task Q4 : What is non-recourse debt / loan? What is mezzanine finance
explained with an example.
Task Q4 Solution :
Non-Recourse Debt: A debt /loan which doesn’t make borrower personally liable
for repayment beyond the pledged collateral of the loan.
Mezzanine finance: It is such type of finance that includes both the features equity
and debt, this debt capital gives right to lender to convert their debt or loan into
equity after senior debts are paid back, at the time of default.
Example:
A bank ABC provides company XYZ producing fertilizers Rs.50 million with
8% interest in mezzanine financing, with right to convert its loan into equity if
company default
Task Q5: Explain in detail with reasons of what the sectors are or which type
of projects are suitable for project finance?
Task Q5 Solution :
Generally, oil extraction, power production, telecommunication, transportation and
infrastructure sectors are suitable for project finance. Such capital intensive sectors
or projects along with long gestation period prefer to take project finance.
Reason:
1. Project financing is very complex so it is suitable for only long term and big
projects.
2. Project financing helps sponsors to shield their assets from risk of project
failure.
3. Newly formed entity can’t manage project finance, as they have not their own
credit or operating income.
4. By implementation of project financing, sponsor can get tax benefits or
benefit of better tax treatment.
5. Here, multiple participants are allowed, they can handle the operations of
project, it will be benefit for such type of project.