PROJECT FINANCING:

Project financing requires that the loan is repaid from the cash-flow of that project. Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project.

When financing projects, we try our possible best to minimize the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in: (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its full capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end. We minimize the dangers by identifying and analyzing all the risk that may bear upon the project, by allocating the dangers if any, among the parties and by creating mechanism to manage the risk or dangers. If the risk cannot be minimized then same will be built into the interest rate margin for the loan.

STEP 1 - Risk Identification / Analysis
We usually prepare a feasibility study, e.g. as to the construction and operation of a mine, real estate or hotel. We will carefully review the study and may engage independent expert consultants to supplement it. The matters of particular focus will be whether the costs of the project have been properly assessed and whether the cash-flow streams from the project are properly calculated. Some risks are analysed using financial models to determine the project's cash-flow and hence the ability of the project to meet repayment schedules. Different scenarios will be examined by adjusting economic variables such as inflation, interest rates, exchange rates and prices for the inputs and output of the project.

STEP 2 - Risk Allocation
Once the risks are identified and analysed, they are allocated by the parties through negotiation of the contractual framework. Ideally, a risk should be allocated to the party who is the most appropriate to bear it (i.e. who is in the best position to manage, control and insure against it) and who has the financial capacity to bear it. We allocate uncontrollable risks wisely and ensures that each party has an interest in fixing such risks. Generally, commercial risks are sought to be allocated to the private sector and political risks to the state sector.

STEP 3 - Risk Management
Risks must be also managed in order to minimise the possibility of the risk event occurring and to minimise its consequences if it does occur. We ensure that the greater the risks that we bear, the more informed we are and the greater our control over the project. Since we take security over the entire project and must be prepared to step in and take it over if the borrower defaults. This requires that we must be involved in and monitor the project closely. Such risk management is facilitated by imposing reporting obligations on the borrower and controls over project accounts. Such measures leads to the flexibility desired by borrower and risk management mechanisms required by the financier.

Such risk may include but not limited to the following:
1. Construction Phase Risk / Completion Risk: This refers to the issue of not completing the project on schedule or on budget, due to technical, labour or other difficulties and such delays or cost increase may delay loan repayment and cause interest to accumulate

2. Operation Phase Risk - Operating risk: These are general risks that may affect the cash-flow of the project by increasing the operating costs or affecting the project's capacity to continue to generate the quantity and quality of the planned output over the life of the project

3. Market / Off-Take Risk: Obviously, the loan can only be repaid if the product that is generated can be turned into cash. Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate cash-flow to service the debt. The best mechanism for minimising market risk before lending takes place is an acceptable forward sales contact entered into with a financially sound purchaser or the end buyer. What ever the risk, we are ready, willing and able to finance any viable high-end project