SEWON KIM KEVIN TRAN CHRISTINA MOHR LUISE LOLENZ

Index What is the Project Finance? Difference between PF and CF Structure of the Project Finance SPC (Special Purpose Company) Property of the Project Finance Managing the risk Example Conclusion References

1. What is the PF?

One of the method of financing for project The long term financing of infrastructure and industrial projects based upon the cash flows of the project. Finance for a particular project Mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project.

2. Difference between PF and CF

Corporate finance (CF) is based upon credit of corporate operating many project. For CF although the financial condition of one project get better, risk of credit would take place due to the weak of another project operated by that company.

2. Difference between PF and CF Project finance (PF) is different from traditional forms of finance The lender principally looks to the assets and revenue of the certain project in order to secure and service the loan.

3. Structure of the PF PF structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. The loans are commonly secured by the project assets and paid entirely from project cash flow, rather than from the assets of the project sponsors.

3. Structure of the PF

4. SPC (Special Purpose Company)

SPC is made by many companies involved specific project to fulfil narrow, specific or temporary objectives. SPC are typically used by companies to isolate the firm from financial risk SPC is created for each project shielding other assets from the bad effects of a project failure. As a SPC, the project company has no assets other than the project.

5. Property of the PF Thorough control of cash flow Because project finance is dependent on the cash flow estimated before commencing project, through control of cash flow is needed. Multiple supporter of loan Most of the project using the PF is massive scale. Therefore, numerous loan institutions comprise syndicate to support the project and decrease the risk of finance.

5. Property of the PF Complex structure of operation/finance Project finance has complex structure of operation due to many kinds of relationship of the person directly involved contract. Establish of Independent project company (SPC) The condition of project doesn’t affect a credit of business owner because it just supports the project establishing SPC and SPC becomes active operator.

6. Managing the risk

Lenders are concerned with minimizing the dangers of any events which could have a negative impact on the financial performance of the project The risk could result in: (1)the project not being completed on time, on budget, or at all (2) the project not operating at its full capacity (3) the project failing to generate sufficient revenue to service the debt

6. Managing the risk Type of risk Participant Risk Credit Risk Technical Risk Currency Risk Regulatory Risk Approvals Risk Political Risk

6. Managing the risk The minimization of risks involves a three step process Risk management Risks must be also managed in order to minimize the possibility of the risk and to minimize its consequences if it does occur. Risk allocation Risks are allocated by the parties who is the most appropriate to bear it Risk identification and analysis Risks are analyzed using financial models

7. Example

Acme Coal Co and Energen Inc. Acme Coal Co and Energen Inc. Supplies the energy to consumers. Agree to build power plant to accomplish their respective goals

Acme Coal Co and Energen Inc. sign a memorandum of understanding to set out the intentions of the two parties form an SPC (Special Purpose Corporation) called Power Holdings Inc. divide the shares between them according to their contributions

Acme Coal Co and Energen Inc. signs a construction contract with Acme Construction to build a power plant affiliate of Acme Coal only company with the know-how to construct a power plant in accordance with Acme's delivery specification.

Acme Coal Co and Energen Inc. Power Holdings receives financing from a development bank and a commercial bank. These banks provide a guarantee to Acme Construction's financier that the company can pay for the completion of construction

Acme Coal Co and Energen Inc. paid as such: 10% up front 10% midway through construction 10% shortly before completion and 70% upon transfer of title to Power Holdings, which becomes the owner of the power plant.

Acme Coal Co and Energen Inc. form Power Manage Inc., another SPC, to manage the facility is primarily to protect Acme Coal and Energen If a disaster happens at the plant, prospective plaintiffs cannot sue Acme Coal or Energen and target their assets because neither company owns or operates the plant.

8. Conclusion Each project financing has a variety of differences. Each project gives rise to its own unique risks and hence poses its own unique challenges. In every case, the parties need to act creatively to meet those challenges and to effectively and efficiently minimize the risks in order to ensure that the project financing will be a success.

References Scott Hoffman, The Law & Business of International Project Finance (3rd ed. 2007, Cambridge Univ. Press). Marco Sorge, The nature of credit risk in project finance, BIS Quarterly Review, December 2004, p. 91 Project Finance Magazine