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Project Financing Sources Overview

There are three main sources of project financing: private debt, public debt, and equity financing. Private debt includes loans from banks and institutional investors, and has a cheaper cost of capital than equity. Public debt is raised by governments to fund infrastructure and has the cheapest cost. Equity financing involves selling shares and has the highest cost of capital since equity holders are paid last, but debt does not need to be repaid if the project fails. The document then provides examples of financial products within each category such as private activity bonds under public debt.

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Muzamil Rehman
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57 views3 pages

Project Financing Sources Overview

There are three main sources of project financing: private debt, public debt, and equity financing. Private debt includes loans from banks and institutional investors, and has a cheaper cost of capital than equity. Public debt is raised by governments to fund infrastructure and has the cheapest cost. Equity financing involves selling shares and has the highest cost of capital since equity holders are paid last, but debt does not need to be repaid if the project fails. The document then provides examples of financial products within each category such as private activity bonds under public debt.

Uploaded by

Muzamil Rehman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Assignment

Name: Muzammil Rehman Roll No: MBNBM-21-05


Subject: Project Financing Management Submitted To: Dr Omair
Bucha

Sources of Funding For projects


Sources of project financing will depend on the structuring of the project (which is heavily
impacted by project risks). There are many financial products in the market to pay for
construction costs. The cost (interest rates and fees) of each financial product will depend on
the type of asset and risk profile.
The Sources are

 Private Dept
 Public Debt
 Equity Financing

Private Debt
 Private debt refers to loans that are typically made by non-bank investors. Companies
typically access private debt to finance growth, expand their working capital, or fund
real estate development. Institutional investors have increasingly turned to private
debt as a source of diversified returns.
 Cheaper cost of capital than equity financing since debt holders will be repaid first

Types of Private Debt


Bank Debt
Project finance loans provided by commercial banks. Tenors range between 5-15 years.
Capital Markets/Taxable Bonds
Capital Markets consist of suppliers of funds and users of funds engaging in the trade of long-
term debt and equity. Primary markets consist of those engaged in the issuance of new equity
stock and bond issuances, while secondary markets trade existing securities.
Institutional Investors/Private Placement
Private placement bonds are unregistered debt securities that are sold to accredited investors
via investment banks. Typical use of proceeds is like those of public bonds: refinancing debt,
expansion, acquisitions, dividends, and stock buyback and recapitalization programs.

Public Debt
 Debt that is raised by the government under advisement of an investment bank or
advisor
 Cheapest cost of capital since it is a government sponsored program used to spur
infrastructure development

Types of Public Debt


Capital Markets/Private Activity Bonds
Federal program that authorizes issuance of tax-exempt bonds for the financing of capital
costs of transportation projects. Financing terms based on project economics, capital markets,
credit rating and IRS rules.

Equity Financing
 Equity that is raised by a developer or private equity fund. Share. When companies
sell shares to investors to raise capital, it is called equity financing. The benefit of
equity financing to a business is that the money received doesn't have to be repaid. If
the company fails, the funds raised aren't returned to shareholders.
 Highest cost of capital since equity is repaid last and rates of return must reflect the
riskiness of investment
Types of Equity Financing
Subordinated Debt
Subordinated debt is any type of loan that's paid after all other corporate debts and loans are
repaid, in the case of borrower default. Borrowers of subordinated debt are usually larger
corporations or other business entities.
Shareholder Loans
Part of shareholder funding can be provided in the form of shareholder loans. Allows for
lower cost of capital
Bridge Loans
A bridge loan is a short-term financing tool used to provide immediate cash flow until a long-
term financing option can be arranged or existing obligation is extinguished
Strategic and passive equity
Passive investing broadly refers to a buy-and-hold portfolio strategy for long-term investment
horizons, with minimal trading in the market. Funds contributed by the shareholders of the
development entity. Repayment after O&M and debt service. Required by lenders to ensure
capital at risk. Ranges between 5-50% of private financing, depending on project.

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