Project Finance Study Guide

Vocabulary flashcards for project finance concepts.

Project Finance

Long-term financing of infrastructure and industrial projects based on projected cashflows of the project.

Special Purpose Vehicle (SPV)

An independent company created for a specific project to isolate financial risks and accomplish specific business objectives.

Bankability

The degree to which a project is acceptable for lenders and investors, characterized by predictable cashflows, strong contracts, and a well-structured legal and financing framework.

Financial Model in Project Finance

A tool used to forecast a project’s financial performance, determine feasibility, support loan structuring, and provide key financial indicators (KPIs) like DSCR.

Debt Service Coverage Ratio (DSCR)

A key financial ratio that measures the project’s ability to meet its debt obligations from operating cashflows.

Net Present Value (NPV)

The value of future cashflows discounted back to the present using a discount rate (typically the cost of capital).

Sensitivity Analysis

A method to show how changes in key assumptions (e.g., price, cost, interest rate) can affect the performance of a project.

Cash Conversion Cycle (CCC)

Measures how long it takes for a company or project to turn its investments in inventory and operations into cash received from customers.

Internal Rate of Return (IRR)

The discount rate at which the Net Present Value (NPV) of the project’s cash flows equals zero.

Free Cash Flow (FCF)

Cash generated by the project after covering operating expenses and capital expenditures, available for debt repayment and investor returns.

Construction Risk

The risk of delays or cost overruns during the construction phase of a project. Mitigated through fixed-price EPC contracts, performance bonds and insurance.

Operating Risk

The risk of underperformance in terms of output once the project is operational.

Market Risk

The risk associated with changes in demand or pricing of the project's output.

Political Risk

The risk associated with regulatory changes and tax regimes.

Currency Risk

The risk of foreign exchange losses.

Foreign Exchange (FX) Risk Mitigation

Addressed via currency matching or hedging instruments like forward contracts and currency swaps.

Liquidity in Project Finance

Ensures the project can meet short-term obligations and maintain operations.

Trade Credit

Trade credit allows a project to buy now and pay later, reducing the need for immediate financing.

French Amortization

Equal installment payments over time, with interest declining and principal increasing.

German Amortization

Equal principal payments (capital repayments), so total payments decline.

Grace Period

Delays principal and sometimes interest payments, used during construction or early operational phases.

Debt Sculpting

Adjusts repayments to match cash inflows, maintaining DSCR and avoiding overburdening early cash flows.

Early Warning Signals

Include low DSCR, rising costs, delays, and breaching established covenants.

Break-Even Analysis

Shows the revenue needed to cover costs and helps evaluate if the project is viable.

Cost of Capital

The required return from equity and debt holders, used to discount cash flows and affects NPV and investment decisions.

Multilateral Lenders (e.g., World Bank)

Provide lower rates, longer maturities, political risk coverage, and investor confidence.

Bankable Financial Model

A model that is realistic, transparent, includes all cash flows and assumptions, and shows acceptable ratios (e.g., DSCR > 1.2).

Loan Covenants

Monitored by agent banks and independent auditors or advisors.

Due Diligence

Ensures technical, financial, legal, and environmental risks are known and addressed before funding.

Break-Even Point

When total revenue equals total cost; marks the start of profitability.

OPEX Assumptions

Energy, labor, maintenance, and inflation; considered key to accurate budgeting.

Debt-to-equity Ratio

Determines leverage. Too much debt raises risk; too much equity reduces returns.

NPV

Net Present Value is he present value of the expected cash flows, less the costs of acquiring the investment.