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Project Finance

Project finance is the financing of long-term infrastructure, industrial projects and public services based on a non-recourse or limited recourse financial structure, in which project debt and equity used to finance the project are paid back from the cash flow generated by the project.

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Breakdown of Project Finance
Now let us break down each of the components of this definition to get a detailed understanding of what it incorporates:
  #1 Financing of long-term infrastructure, industrial projects, and public services 
Project Finance is generally used in oil extraction, power production, and infrastructure sectors. These are the most appropriate sectors for developing this structured financing techniques as they have low technological risk, a reasonably predictable market and the possibility of selling to a single buyer or a few large buyers based on multi-year contracts (e.g. take-or-pay contracts). 
  #2 Non-Recourse/Limited Recourse Financial structure 
Project Finance is the structured financing of a specific economic entity – a Special Purpose Vehicle (SPV) – created by the sponsors using equity or debt. The lender considers the cash flow generated from this entity as the major source of loan reimbursement. 
Hence, if the borrower defaults, the issuer can seize the assets of the said SPV but cannot seek out the borrower for any further compensation, even if the SPV does not cover the full value of the amount defaulted.
  #3 Payment from cash flow generated by the project 
Cash flows generated by the SPV must be sufficient to cover payments for operating costs and to service the debt in terms of capital repayment and interest. Because the priority use of cash flow is to fund operating costs and to service the debt, only residual funds after the latter are covered can be used to pay dividends to sponsors undertaking project finance. 
 
Why Do Sponsors Use Project Finance?
A sponsor (the entity requiring finance to fund projects) can choose to finance a new project using two alternatives:
    The new initiative is financed on the balance sheet (corporate financing)
    The new project is incorporated into a newly created economic entity, the SPV, and financed off balance sheet (project financing)
  #1 Corporate Finance 
Alternative 1 means that the sponsors use all the assets and cash flows from the existing firm to guarantee additional credit provided by lenders. If the project is not successful all the remaining assets and cash flows can serve as a source of repayment for all the creditors (old and new) of the combined entity (existing firm plus new project).
#2 Project Finance 
Alternative 2 means instead that the new project and the existing firm live two separate lives. If the project is not successful, project creditors have no (or very limited) claim on sponsoring firm’s assets and cash flows. The existing from shareholders and then benefit from the separate incorporation of the new project into an SPV.
 
How Is Project Finance Difference from Corporate Finance?
Now that we have a basic understanding of what project finance means, let us understand how project finance differs from corporate finance. The table below outlines important differences between the two types of financing that need to be taken into account.

Back to Top, Project Financing
Factor Corporate FinancingProject Financing
Guarantees for financing
Asset of the borrowerProject assets
Effect on financial elasticityReduction of financial elasticity of the borrowerNone/Heavily reduced effect for sponsors
Accounting treatmentOn Balance sheetOff Balance sheet
Degree of Leverage utilizableDepends on borrower's balance sheetDepends on the cash flows generated by the project
Main variable underlying the granting of financingCustomer relations, Solidity of balance sheet, profitabilityFuture cash flows

Who are the Sponsors of Project Finance/Equity Investor?

By participating in a project finance venture/equity investor, each project sponsor pursues a clear objective, which differs depending on the type of sponsor. In brief, four types of sponsors are very often involved in such transactions:

  1. Industrial sponsors – They see the initiative as upstream and downstream integrated or in some way as linked to the core business
  2. Public sponsors – Central or local government, municipalities and municipalized companies whose aims center on social welfare
  3. Contractor sponsors – Who develop, build, or run plants and are interested in participating in the initiative by providing equity and or subordinated debt
  4. Financial sponsors/investors – Plays part of a project finance initiative with a motive to invest capital in high profit deals. They have high propensity of risk and seek substantial return on investments

KB Project Financing and
Equity Investor Services

KB supports our valued customers with 3 out of 4 types of sponsors
in project finance and equity investor.

Industrial Sponsor

For the following sectors: Oil&Gas, Power Plant, Mineral Mine, Water Production Plant

Contractor Sponsor

For the following sectors: Oil&Gas, Power Plant, Mineral Mine, Water Production Plant

Financial Investor

For the following sectors: Oil&Gas, Power Plant, Mineral Mine, Water Production Plant

Mobirise

Equity Investor

Equity investors are people who invest money into a company in exchange for a share of ownership in the company.

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Equity investors are people who invest money into a company in exchange for a share of ownership in the company. Typically, equity investors have no guarantee of a return on their investment, and may lose their money should the company go out of business. In the event that the company is liquidated, the equity investor may be entitled to a share of the assets.
These investors often expect certain benefits to offset the risk of their investment. For example, an investment agreement may stipulate that the initial investment be paid back over a specific number of years, followed by a share of the profits after the investment is paid off. The terms of an investment agreement can be specified by the company and the investor – and should be considered fair by both parties.

An investment brings elements of risk, and the equity investor must balance the potential for risk with the possibility of reward. For both the investor and the company, the benefits of the investment must be worth the inherent risk. Detailing the specific requirements for the investment and potential payoffs/losses should be taken care of before the investment and should be scrutinized by financial advisors.

Turnkey/EPC

KB supports our customers with full turnkey construction contract/EPC sponsors who might also perform Thai Turnkey if necessary (owners will pay contractor with future cashflow of the project after project construction completion)

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Globally, the full turnkey construction contract also referred to as "EPC" (Engineering, Procurement and Construction) offers full guarantee of efficiency in the implementation of the project with minimal intervention on the investor’s side. Responsibility is centralized in Contractor's hands and do not expose owners to risk inherent to contracts with equipment suppliers and site services providers.
The EPC contract guarantees compensation for delays in project completion and also assumes full responsibility for overall project cost and performances as defined in the Contract.
The single point of control over for the total plant design and project management provided by the EPC contract greatly favours the homogeneity of the plant concept as well as of equipment and materials in general.

KB Direct Investment

"Any Potential Project"

KB is also taking part in investor role for any
interesting/potential project in any sector
with project value 30-100 million THB
and 20-25% ROI. For more information
please do not hesitate to contact us.

Email KB
Mobirise
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Phone: +66 (8) 4546 0199
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