Project Finance & Feasibility

Finance is a general term that describes two different but intertwined activities. The first is the study of money and how it is utilised and the other is more to do the means of obtaining needed resources or monies. Because individuals, corporations and governments all need finance to function, the subject is often divided into three separate categories - personal finance, public finance and corporate finance. Given that Evolucion Properties is a large company with multiple departments, the Corporate Finance department will assess whether or not the Argyle Hotel and Conference Centre project is viable and if so how it will be paid for. Corporate Finance is an internal department that supervises the financial undertakings of a company. It is mainly focused on increasing shareholder value by carrying out long and short-term financial planning while creating various plans to do this. Everything from capital investment to stock market speculation comes under the jurisdiction of the corporate finance department. When considering Capital Investment the Corporate Finance department will consider if a suggested investment should be made? Should pay for it with equity or seek finance, or should they maybe combine both methods? Financial Method One definition of Project Financing is: A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan Nevitt and Fabozzi (2000) In other words, the aim of project financing is to arrange credit for a project, which will help the sponsor but not affect the credit rating or balance sheet of the company. The definition above highlights that in project finance, lenders to the development start by looking at the cash flows of a project as the means by which the loan will be repaid and consider the economic unit as one of the prime considerations of project financing.

Effective projects have: Enforceable contractual arrangements Strong financial structures Thorough cash flow modelling Good risk management systems

Sensible risk distribution Effective monitoring Stakeholder agreement

The main financial factors considered when financing a project are: Operating Considerations Cost projections (capital and operational outlays) Turnover projections based on productivity and price; Cost to the public sector in terms of unitary payments and/or subsidies; Tax Interest rates, rate of inflation, product or service cost Length of concession/operation.

Funding Considerations Equity returns Internal rate of returns Debt coverage ratios like debt service coverage ratio and loan life Coverage ratio, project life cover ratio and interest rate cover ratio Valuation multiples Gearing in terms of debt/equity ratio Security on fixed and floating loans Parent company guarantees.

A lot of coverage ratios above are decided by lenders to ensure that a project can repay the principal and interest based on the projected cash flows over the life cycle of the development. Means of obtaining finance include: Senior ranking bank loans. These can be split into multiple tranches for different maturities or purposes such as working capital or bridging finance. These are usually secured via a lien against the assets of the debtor. For the loan to be granted, there generally can be no other existing liens on the debtor's assets. That means that if the person or organisation borrowing should be exposed to an insolvency event then the assets used to secure the loan must be used to repay the Senior bank loan for any other debt

Mezzanine bank loans which fill the void between debt and equity. Mezzanine financing is basically debt capital that gives the lender the right to change to an ownership or equity interest in the company if the borrower does not fulfil their obligations. This form of financing is beneficial because it is treated like equity on a company's balance sheet which in turn makes it easier to obtain regular bank loans.

To get mezzanine financing, a company must have a good reputation, a proven track record of making profit, and feasible plans for growth.

Junior ranking bank loans often in the form of loan stock or subordinated debt. Junior debt tends to be unsecured and has a lower ranking than of another debt claim on the same asset. Should the borrower become insolvent, the junior debt has a less chance of being paid back, with either money or with assets, as senior debt will be given priority. An example of junior debt is the second mortgage.

Equity in the form of ordinary shares or preference shares which attract voting rights. Shares are a unit of ownership interest in a company or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, it does entitle the owner to an equal distribution in any profits in the form of dividends. Capital Markets utilising fixed coupon bonds, index-linked bonds or asset-backed commercial paper. A capital Market is a market in which individuals and institutions trade financial securities. Organizations/institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Therefore, this type of market is comprised of both the primary and secondary markets. Both the stock and bond markets are parts of the capital markets. For example, when a company conducts an IPO, it is using the public for capital and is therefore using the capital markets.

Monoline insurers. These are insurance companies that provide guarantees to issuers, generally in the form of credit wraps that improve the credit of the borrower. Companies seeking finance will often go to monoline insurance companies to either boost the rating of one of their debt issues or to ensure that a debt issue does not become downgraded. The ratings of debt issues that are securitized by credit wraps often depend on the insurers own credit rating. Grant funding can be obtained directly from government bodies such as Scottish Enterprise.