Ch12 Project financing

Question 1

Project financing

Answer 1

• construction and development of large infrastructure and industrial projects
• capital raised from multiple sources
• financing is specific to the project only, relying primarily on the project’s cash flows from repayment

Question 2

non-recourse loan

Answer 2

• loans secured with project’s assets as collateral not from general assets or creditworthiness of sponsors
• lenders are given a lien on all the project’s assets and will assume control if not paid
• higher interest rate due to higher risks (cash flow and unexpected higher cost in project)

Question 3

Types of debt

Answer 3

1. senior debt
   - has seniority over all sources of debt in the event of default (get paid first)
2. mezzanine debt
   - has priority only over equity but after all other creditors

Question 4

Five types of financing arrangements

Answer 4

1. completion and quality assurance arrangements
   - for projects in which sponsors provides technology and expterise to finalize project
2. raw material supply arrangements
   - for projects in which sponsors required to guarantee supply of raw materials
3. output or service purchase arrangements
   - for projects where sponsors required to purchase all the output or services
4. completion, quality assurance and purchase agreements (sponsor responbile for force majeour)
5. Cash flow guarantee arrangements