Please enable JavaScript.
Coggle requires JavaScript to display documents.
5.5 Investors in Major Projects - Coggle Diagram
5.5
Investors in Major Projects
Approaches to financing major projects
Traditional financing approach
Lender
Provide part of the funds to the sponsor
Project
Once the project reaches the operational stage, it starts generating revenue to the sponsor who pays back the loan
Sponsor
The sponsor invest the funds in the project
Project financing approach
Requires the incorporation of a special purpose entity (SPE)
SPE is used to collect the specific finances for the project
The lender issue the loan to the SPE
The SPE provide the investment for the project
Organisational and financial structure of project finance
The approaches are different in terms of risk management
In case of underperformance
Delays
Insufficient revenue
In the traditional approach, the sponsor has a legal obligation to repay the loan
In the project financing approach, the SPE is forced to declare bankruptcy
Financial Risk
In traditional financing (full recourse financing) there is a collateral to repay the debt
In project financing (non-recourse financing) there is no collateral
Public-private partnership (PPP)
Who invests in major engineering projects?
Equity and debt
Credit enhancement
What can a major project SPE do to make sure that it convinces lenders that it is financially solvent?
Credit enhancement describes the process where a company (eg the special purpose entity) tries to reassure the lender that it will be able to repay its debt.