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Topic 1. Introduction to Project Financial Management

Topic 1. Introduction to Project Financial Management. Prof. dr. A Paškevičius. About the Course. Presentation of the Course program Literature, WEB site Schedule for the work Self-study assignments Assessment requirements.

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Topic 1. Introduction to Project Financial Management

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  1. Topic 1. Introduction to Project Financial Management Prof. dr. A Paškevičius

  2. About the Course • Presentation of the Course program • Literature, WEB site • Schedule for the work • Self-study assignments • Assessment requirements

  3. Topic 1. Introduction to Project Financial Management 1.1 Understanding of the Project Finance 1.2 Methods of the Project financing 1.3 Project financing sources 1.4 Contract structure of a Project Finance Deal

  4. 1.1. Understanding of the Project Finance Project finance is the structured financing of a specific economic entity – the SPY, or special-purpose vehicle, also known as the project company – created by sponsors using equity or mezzanine debt and for which the lender considers cash flows as being the primary source of loan reimbursement, whereas assets represent only collateral.

  5. 1.2 Methods of the Project financing A sponsor can choose to finance a new project using two alternatives: 1. The new initiative is financed on balance sheet (corporate financing). 2. The new project is incorporated into a newly created economic entity, the SPY, and financed off balance sheet (project financing)

  6. 1.2 Methods of the Project financing Alternative 1 means that sponsors use all the assets and cash flows from the existing firm to guarantee the additional credit provided by lenders. If the project is not successful, all the remaining assets and cash flows can serve as a source of repayment for all the creditors (old and new) of the combined entity (existing firm plus new project).

  7. 1.2 Methods of the Project financing Alternative 2 means, instead, that the new project and the existing firm live two separate lives. If the project is not successful, project creditors have no (or very limited) claim on the sponsoring firms' assets and cash flows. The existing firm's shareholders can then benefit from the separate incorporation of the new project into an SPY.

  8. 1.3 Project financing sources Four types of sponsors are very often involved in a project financing venture: • Industrial sponsors, who see the initiative as upstream or downstream integrated or in some way as linked to their core business; • Public sponsors (central or local government, municipalities, or municipalized companies), whose aims center on social welfare

  9. 1.3 Project financing sources 3. Contractor/sponsors, who develop, build, or run plants and are interested in participating in the initiative by providing equity and/or subordinated debt. 4. Purely financial investors.

  10. Comfort Comfort letter letter Lending Host Project government banks sponsors Fuel Project Product supplier company purchaser O&MA (3) RMSA Raw (2) material Plant Plant operator constructor 1.4 Contract structure of a Project Finance Deal Concessions Bank facilities and permits Equity subscription Security FSA (1) Sales agreement TKCC (4)

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