What is Project Financing :
What is Project Financing A cash flow based financing
Without recourse to sponsors
To a project that is a discrete economic unit
In a sector / product that is in the maturity phase
Which involves identification and mitigation of risks by allocating risks to parties best able to manage it
Project assets provide collateral
Promoters provide contractual rather than financial support What a lender essentially looks for in such a transaction is adequacy, predictability andamp; certainty of cash flows Creating Customer Value
Do Power Generation Projects meet criteria of Project Financing :
Do Power Generation Projects meet criteria of Project Financing Are cash flows adequate andamp; certain - Adequate Probably Yes, Certain Probably No
Can it be structured without sponsor recourse - No
Can the project be put up as a discrete economic unit - Yes
Is the sector in the maturity phase – Conventional Yes, Renewables No
Can risks be adequately identified andamp; mitigated and/ or allocated - Partially, since sector has high regulation characteristics
Can the project assets provide collateral - Yes
Can the promoters provide only contractual and no financial support - No Creating Customer Value
The Impact of Proposed Tariff Norms on Project Cashflows :
The Impact of Proposed Tariff Norms on Project Cashflows Debt Repayment Capacity
Tenors of debt and interest rates
Options to extend debt tenors fairly limited
Incorporation of the same in the cashflows
Operational norms
In the waterfall mechanism of cashflows, lenders payment is subsequent to the Oandamp;M payments
Foreign Exchange Variation
Pass through ideal for project, but sub-optimal for the sector and detrimental to the offtaker
Hedging strategies on a pilot basis might reveal the hidden gains
Depreciation
Despite the theoretical debate on its relevance, used for meeting debt repayments
Mis-matches in the two lead to
Dipping into the ROE first
And then liquidity problems Creating Customer Value
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THANK YOU ! Mohanjit Singh
mohanjit.singh@rabobank.com Creating Customer Value