Project Finance

PROJECT FINANCE SUBJECT !!

EXAM QUESTION

Unit Schedule

1 Introduction to Project Finance
2 Identification and Management of Project Risk
3 Risk Mitigation Strategies
4 Project Finance Case Studies I
5 Sources of Finance and Credit Enhancement
6 Analysing Project Viability
7 Project Finance Documentation
8 Establishing Project Viability
9 The Project Finance Model
10 Project Finance Case Studies II
11 Project Finance Case Studies III

 

No need reference List and in text reference

You just give website link under the each sub answer where you get an information from.

 

Link may help

Project Finance chapter prepared by HSBC:: http://www.hsbcnet.com/gbm/attachments/products-services/financing/project-finance.pdf

16 Risk : http://www.iaf.com.au/16risks.htm

 

 

 

 

Risk& Risk Mitigation

 

Question 1: Risk& Risk Mitigation

them. By doing this the value of the project is enhanced.

  1. a)  Explain why a “project” is enhanced by the allocation of risks?
  2. b)  Explain and give 4 examples of projects risks & how they can be allocated.
  3. c) Explain why risks are ranked “High, Medium or Low”?
  4. d) Explain the importance of “mitigation” when assessing risks? and
  5. e) R.Tinsley suggests a caveat should “ensure the 3 party is good for it” Explain

 

ANS: ( 330WORDS )

a)

 

b)

 

c)

 

d)

 

e)

 

 

 

 

Question 2: Risk & Risk Mitigation

It is generally accepted by financial markets that projects structured as Project Financed can be more leveraged than traditional on-balance sheet financing projects. Explain:

  1. a)  Why project done under a project finance structure can be more highly leveraged,
  2. b)  Why is project finance used, list four (4) objectives that a sponsor can achieve by using project finance & give examples; and

ANS: ( 300WORDS )

a)

 

b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question 3 : Risk & Risk Mitigation

Henry A. Davis in his book “Project Finance: Practical Case studies” reviewed some 38 projects of which 11 have defaulted or come close to default.

The major causes for project default/near default include:

  1. Market risk event 2. Counterparty risk event 3. Currency risk event 4. High leverage 5. Political risk event
 6. High purchase price  7. Construction risk event and  8. Operating risk event.

Explain:

  1. a)  Four (4) of the above using examples, and
  2. b)  How can these risks you have selected in (a) above be avoided/mitigated when 
reviewing a project yet to be developed.

 

ANS: ( 300WORDS )

a)

 

b)

 

 

Question 4: Risk & Risk Mitigation

The key to Project Finance is the allocation of Risks to those best able to manage them. One means is by way of “Guarantees”.

(a) Explain what is meant by the above statement,

(b) Explain and give four (4) examples of a guarantee &

(c) How do these guarantees assist in minimising risks in project finance.

 

ANS: ( 300WORDS )

a)

 

b)

 

c)

 

 

Question 5: Risk & Risk Mitigation

Based on the 16 risks identified by Richard Tinsley’s book “Project Finance” list five (5) risks and state:

(a) What “mitigation action” can be taken to minimize these risks;

(b) The phase in the project that the risks may occurs

(c) Explain why risks are described as “dynamic” rather than static?

 

ANS: ( 330WORDS )

a)

 

b)

 

c)

 

 

 

 

Risk

Question 6: Risk

Banks in order to ensure a project is completed require loans to be “recourse” to the sponsors. Once the project has reached as “certain stage” it becomes “non-recourse” to the sponsors.

(a) Do all projects have this flexibility of recourse/non-recourse funding?

(b) Why do banks require “recourse” loans?

(c) What are the implications for Sponsors of each? and

(d) How do sponsors achieve a project becoming non-recourse?

 

ANS: ( 300WORDS )

a)

 

b)

 

c)

 

d)

 

 

 

 

 

 

 

 

Question 7: Risk

Companies (Sponsors) use project finance to reduce credit risk and shift liabilities to other parties. This allows sponsors to:

(a) Utilize higher leverage;

(b) Minimize credit impact on corporate balance sheet and

(c) Finance larger projects than corporate (sponsors) credit would allow. Explain the above statements.

 

ANS: ( 300WORDS )

a)

 

b)

 

c)

 

 

 

 

 

 

 

 

 

Question 8: Risk

  1. Tinsley refers to 5 mechanisms for risk structuring; these being
  2. Contracts 2. Trigger 3. Finance 4. Study & 5. Avoided

(a) Explain each of the above 5 mechanisms using examples;

(b) which (two) 2 do you consider the most important and why.

 

ANS: ( 300WORDS )

a)

 

b)

 

 

 

Project Risk – Identification and Management

Question 9: Project Risk – Identification and Management

Nevitt suggests that there are 3 risk phases in the life of a project -Phase 1. Engineering and Construction. Phase 2. Start-Up and Phase 3. Operating Phase.

  1. a)  Discuss two (2) key risks which may arise during each of these 3 phases. And
  2. b)  Suggest ways that these risks could be mitigated and managed.

 

ANS: ( 300WORDS )

a)

 

b)

 

 

Feasibility Studies (Lec 8)

Question 10: Feasibility Studies

The “Financial Model” is deemed to be an integral part of project finance:

  1. a) Explain how the “Financial Model” is used in project finance;
  2. b) S&P states “The project financing evaluation process largely eliminates the truly high-risk projects” Is this a correct statement? Explain and
  3. c) Feasibility Studies are said to be analysed from two perspectives – the equity sponsor to a project and the lender to a project. Explain the different perspectives.

 

ANS: ( 300WORDS )

a)

 

b)

 

c)

 

 

 

 

 

 

 

Credit Ratings

Question 11: Credit Ratings (LEC5)

Credit Ratings have become an integral part of project finance.

Discuss the following using examples:

  1. a) What are the possible benefits of a credit rating for a project in terms of refinancing the construction loan?
  2. b) How else is a credit ratings used in Project Financing?
  3. c) At what stage in a project does one normally seek a credit rating & why at that time? And
  4. d) How can banks ensure a project obtains a credit rating?

 

ANS: ( 300WORDS )

a)

 

 

b)

 

 

c)

 

 

d)

 

Structure & Funding

Question 12: Structure & Funding

Debt markets are critical for project finance so as to enable them to be developed. However, debt markets themselves have their own risk, “liquidity risk” which since the GFC is a major threat to existing and future project financings.

Explain:

  1. a) What is “liquidity risk” for project finance & the debt markets, explain each & give examples, and
  2. b) How, when developing a major project can companies protect themselves from “liquidity risk”? and
  3. c) The sponsors in developing the funding proposal seek strategies to improve

the projects funding and lower its interest cost and protect themselves from “liquidity risk”? Suggest four (4) strategies by which a project’s initial financing could be improved.

 

ANS: ( 300WORDS )

a)

 

 

b)

 

 

c)

 

 

 

 

Question 13: Structure & Funding

In order to refinance a bank loan (construction loan) there are several steps that need to be taken prior to this, namely:

(1) A completion test, and

(2) Obtain a Credit Rating

Explain:

(a) Why are these steps necessary,

(b) Why do projects seek to refinance (Construction) Loans? and

(c) How can the banking syndicate ensure the project seeks a credit rating for the project?

 

ANS: ( 300WORDS )

a)

 

 

 

 

b)

 

 

 

 

c)

 

 

 

 

 

 

Question 14: Structure & Funding

In structuring a project there are a number of alternative structures when establishing a SPV, including: An Incorporated entity or An Unincorporated/Joint Venture entity

Give a brief explanation of

(a) What are the implications to the “Sponsors” Balance Sheet or P&L of each structure and

(b) Assuming a project will be in a “tax loss” situation for the first 5 years which structure would give the best outcome, explain your answer.

 

ANS: ( 300WORDS )

a)

 

 

b)

 

 

 

 

 

 

 

Credit & Funding  Decisions

 

Question 15:Credit & Funding  Decisions

  1. a) How does the banking syndicate ensure that the project will reach phase 2 & 3 and will be completed on schedule?
  2. b) What steps need to be completed to ensure the project can refinance its bank debt? What strategies or steps can be put in place? Use examples.
  3. c) How can the banking syndicate ensure the project seeks a credit rating for the project? And
  4. d) Why do projects seek to refinance the initial bank loans?

ANS: ( 330WORDS )

a)

 

 

 

b)

 

 

c)

 

 

Question 16:Credit & Funding Decisions

Bankability is defined “as the acceptability or otherwise of a projects structure as a basis of project financing”.

(a) Explain the above statement, and

(b) Explain and detail four (4) ways a project can be made more “bankable”?

 

ANS: ( 300WORDS )

a)

 

 

 

b)

 

 

 

Question 17:Credit & Funding Decisions:

The sponsors in developing their funding proposal seek strategies to improve the projects funding via:

(a) Developing strategies by which a project’s initial financing costs could be lowered, Suggest four (4) such strategies;

(b) Why is it important to use a “financial advisor” when developing financing strategies”?

(c) What part does “ECA’s” play in the funding of selected projects and why? and

(d) Some projects (e.g. Kutubu oil) required “political insurance” before banks will lend to the project, how does a project achieve this?

(e) Feasibility Studies are said to be analysed from two perspectives equity sponsor to a project and the lender to a project. Explain the different perspectives

 

 

ANS: ( 300WORDS )

a)

 

 

 

b)

 

 

c)

 

 

 

d)

 

 

 

e)

 

 

Loan Ratios

Question 18: Loan Ratios

(a) In order to protect their loans, banks impose a variety of financial ratios on a project. These are usually “cash flow” measures rather than profitability or balance sheet ratios. Explain why? (100 WORDS)

(b) JUST List 3 of these that may be applicable to a project. (20 WORDS)

(c) How can a project reduce the impact of these ratios when moving into phase 2 or 3? (100 WORDS)

(d) How is Cash flow Waterfall used? (80 WORDS)

 

ANS: ( 300WORDS )

a)

 

 

 

b)

 

 

c)

 

 

 

d)

 

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