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Project Finance – A Summarised Roadmap STAGE 1 ISSUE Macroeconomic / political / regulatory 2 Project bidding process / sponsors 3 Initial evaluation of the project 4 More detailed project evaluation 5 Building the financial statements – operating cashflows 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? Page 1 of 3 STAGE 6 ISSUE Funding the project – debt 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 7 Financial exposures FX, interest and commodity price risk management 8 Capital structuring – debt 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 10 Risk mitigation Page 2 of 3 STAGE 11 ISSUE Documentation issues SOME KEY ISSUES 12 Operation of the project finance facility 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 Page 3 of 3