Question

A). Explain the concept of Project Finance being a network of contracts, including the categories of those contracts and examples on each category.

B). Explain briefly the different categories of sponsors. What distinguishes industrial sponsors from financial sponsors What does PPP refer to as an acronym and explain how this relationship is formulated.

C). Explain briefly the definition of SPV and name three of its distinctive characteristics.

Answer 1

a)

What Is Project Finance?

Project finance is the funding (financing) of long-term infrastructure, industrial projects (long series of contracts), and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project.

Project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights, and interests held as secondary collateral. Project finance is especially attractive to the private sector because companies can fund major projects off-balance sheet.

types of project finance

Off-Balance Sheet

Project debt is typically held in a sufficient minority subsidiary not consolidated on the balance sheet of the respective shareholders. This reduces the project’s impact on the cost of the shareholders’ existing debt and debt capacity. The shareholders are free to use their debt capacity for other investments.

For example, when loans are securitized and sold off as investments, the secured debt is often kept off the bank's books. An operating lease is one of the most common off-balance items.

Non-Recourse Financing

When defaulting on a loan, recourse financing gives lenders full claim to shareholders’ assets or cash flow. In contrast, project financing provides the project company as a limited-liability SPV. The lenders’ recourse is thus limited primarily or entirely to the project’s assets, including completion and performance guarantees and bonds, in case the project company defaults.

Example of Non-Recourse Loan

Many traditional mortgages are non-recourse loans. They can only use the home itself as collateral. This means if the borrower defaults on their mortgage loan, the bank can foreclose on the home, take possession, and sell it to satisfy the loan. But the lender cannot go after any remaining balance on the mortgage and must thus take it as a loss.

b)

Four Kinds of Sponsorships

There are many different ways to sponsor an event. Some offer unique sponsorship packages like phone charging stations and naming rights for specific products. Generally, opportunities to support nonprofits fall into four broad types of sponsorship.

Financial Sponsors

Most discussions of sponsorships focus on financial sponsors. These are the sponsors that give money directly to an organization and campaign leaders to fund their events.

Media Sponsors

Media sponsors are financial sponsors that secure advertising for an event. This can mean purchasing advertising space on local television or in a local newspaper or publishing content about the event on their own channels, like creating a blog post about the event or cause.

In-Kind Sponsors

An in-kind sponsorship is an arrangement where the sponsoring business provides goods or services in lieu of direct financial support. For example, a restaurant may opt to provide food for a fundraising event.

Promotional Partnerships

Promotional partnerships are similar to media sponsors. The difference between these types of sponsorships is that promotional partners are typically individual figures rather than companies and media outlets. A promotional partner advertises the event or cause to his network.

difference between financial sponsors vs industrial sponsors

The financial sponsors group (FSG) is a team within the investment banking division (IBD) of an investment bank that covers private equity (PE) firms and investment funds (referred to as “financial sponsors”). This group differs from industry-focused groups that work with operating companies in a specific sector, and instead, covers buy side firms across all industries.

What Are Public-Private Partnerships(PPP)?

Public-private partnerships involve collaboration between a government agency and a private-sector company that can be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centers. Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place. Public-private partnerships often involve concessions of tax or other operating revenue, protection from liability, or partial ownership rights over nominally public services and property to private sector, for-profit entities.

How Public-Private Partnerships Work

A city government, for example, might be heavily indebted and unable to undertake a capital-intensive building project, but a private enterprise might be interested in funding its construction in exchange for receiving the operating profits once the project is complete.

Public-private partnerships typically have contract periods of 25 to 30 years or longer. Financing comes partly from the private sector but requires payments from the public sector and/or users over the project's lifetime. The private partner participates in designing, completing, implementing, and funding the project, while the public partner focuses on defining and monitoring compliance with the objectives. Risks are distributed between the public and private partners through a process of negotiation, ideally though not always according to the ability of each to assess, control, and cope with them.

Although public works and services may be paid for through a fee from the public authority's revenue budget, such as with hospital projects, concessions may involve the right to direct users' payments—for example, with toll highways. In cases such as shadow tolls for highways, payments are based on actual usage of the service. When wastewater treatment is involved, payment is made with fees collected from users.

c)

What Is a Special Purpose Vehicle (SPV)?

A special purpose vehicle, also called a special purpose entity (SPE), is a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company makes its obligations secure even if the parent company goes bankrupt.

In other cases, the SPV may be created solely to securitize debt so that investors can be assured of repayment.

In any case, the operations of the SPV are limited to the acquisition and financing of specific assets, and the separate company structure serves as a method of isolating the risks of these activities. An SPV may serve as a counterparty for swaps and other credit-sensitive derivative instruments.

CHARACTERSTICS of Special Purpose Vehicles

The following are the most common reasons for creating SPVs:

1. Risk sharing

A corporation’s project may entail significant risks. Creating an SPV enables the corporation to legally isolate the risks of the project and then share this risk with other investors.

2.Securitization

Securitization of loans is a common reason to create an SPV. For example, when issuing mortgage-backed securities from a pool of mortgages, a bank can separate the loans from its other obligations by creating an SPV. The SPV allows investors in the mortgage-backed securities to receive payments for these loans before other creditors of the bank.

3. Asset transfer

Certain types of assets can be hard to transfer. Thus, a company may create an SPV to own these assets. When they want to transfer the assets, they can simply sell the SPV as part of a merger and acquisition (M&A) process.