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Project Finance – A Summarised Roadmap
STAGE
1
ISSUE
Macroeconomic / political /
regulatory
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2
Project bidding process /
sponsors
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3
Initial evaluation of the project
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4
More detailed project evaluation
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5
Building the financial statements
– operating cashflows
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SOME KEY ISSUES
Economic and political stability
Impact of changes in government and political
environment
Trade treaties and membership of political unions e.g.
EU, Asean, Mercosur
Tax
Regulatory environment, including pricing of public
services and utility tariffs / prices
Social objectives, including transfer of technology
skills and local sourcing of services and employment
FX policy and stability and transferability of currency
Stage of the macroeconomic cycle
Open tender vs negotiated contracts
Forming the project consortium and structuring the
transaction to meet their needs
Potential conflicts between the members of the
consortium
Does the Project have a clear commercial rationale?
How sustainable is the competitive advantage?
What might threaten the Project’s competitive
advantage, how strong is the threat and what would
be the likely affect?
Technical and financial evaluation of the project
Key assumptions that have been made in evaluating
the Project
What are the key drivers of the project’s viability?
How will the Project be affected by changes in the
operating assumptions?
Can the principal project risks be mitigated, by whom
and at what price?
What is the cash flow available for debt service?
Are the major assumptions likely to produce a cost for
the consumer which is attractive on a continuing
basis?
What is the Project IRR ( IRR of cash flow available
for debt service)?
What will have a major impact on the Project IRR –
can the risks be mitigated, by who and at what price?
How cyclical or uncertain are the cash flows – can the
cyclicality or uncertainty be mitigated?
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STAGE
6
ISSUE
Funding the project – debt
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SOME KEY ISSUES
Can the project be funded without any form of political
risk insurance and / or involvement of Development
Finance Institutions?
If political risk insurance is not essential, but available,
would it be cheaper to include political risk insurers in
the financing package?
Complications in using political risk insurers – maturity
constraints, sourcing of equipment, bidding
processes?
Can the project be funded exclusively in local
currency?
What financial instruments are most appropriate for
the Project – loans or bonds?
Debt maturity and repayments structure
Syndication strategy
Sources of debt finance
Credit pricing and RAROC
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Financial exposures
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FX, interest and commodity price risk management
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Capital structuring – debt
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9
Capital structuring equity
Desired debt / equity mix
DSCR/ LLCR ratios
What will impact the DSCR /LLCR and can the risks
be mitigated, by whom and at what price?
Plans for refinancing
What is the investor’s target rates of return?
Form of investment – equity, subordinated debt,
contributed assets, government grants
What is the forecast equity IRR/ NPV; what will affect
it and can the risk be managed, and at what price?
How will the returns be achieved?
Dividend restrictions
Exit routes from the project for the investors, including
possible re – financing and flotation
Inter – relationship between the project company and
the equity investors
Support provided by the sponsors to the project
company
Who is assuming the construction / completion risk;
what constitutes completion of the project?
Supply risks – are there appropriate contracts in
place?
Operating risks – who is the operator?
Technical risks – manufacturers’ warranties
Financial hedging
Market risks – purchase arrangements
Reserve Accounts, cash sweep and cash flow
waterfall
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10
Risk mitigation
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STAGE
11
ISSUE
Documentation issues
SOME KEY ISSUES
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12
Operation of the project finance
facility
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Choice of law
Management of fees of professional advisers
Enforceability of claims – efficiency of legal system
Contractual arrangements between the various
parties
Ability for financiers to take over contracts and
enforce security in event of default
Conditions precedent
Compliance with financial and operational covenants
Controls over disbursements
Ongoing information on project performance
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