Feedback Quiz Final Help

You submitted this quiz on Wed 23 Jul 2014 3:01 AM PDT. You got a score of 14.33 out of
20.00. You can attempt again, if you'd like.
Question 1
Which of the following statements about the use of project finance rather than corporate finance
is true?
Your Answer

Score Explanation
Risk of contamination across projects is avoided.

Diversification of cash flows from different projects
improves their stability.

The SPV can manage multiple projects more efficiently.
Inorrect 0.00

Total

0.00 /
1.00
Question Explanation

When project finance is used, all project cash flows and liabilities are isolated from the balance
sheets of project sponsors. Thus, risk of contamination across projects is avoided and the
corporate cost of funding is unaffected by incremental debt to finance the project. It is the SPV
that raises all the money needed to fund one single project and then collects all the cash flows
generated by the project. On this respect, then, cash flows from different projects are isolated
from one another and debt is not co-insured.
Question 2
What category or categories of sponsors most typically play(s) a dual role?
Your Answer

Score Explanation
Industrial sponsors
Correct 0.33

Financial sponsors
Inorrect 0.00

Public sponsors
Inorrect 0.00

Total

0.33 / 1.00

Question Explanation

A dual role requires that the sponsor is also linked to the SPV through one or more industrial
contracts. Financial sponsors are then usually excluded from dual roles as they are only
interested in the financial returns from the project.
Question 3
Which of the following statements about the contractual network is true?
Your Answer

Score Explanation
A less efficient incentive structure is reached when the
counterparty of a project contract is also an industrial sponsor.

A more efficient incentive structure is reached when the
counterparty of a project contract is also an industrial sponsor
Correct 1.00

A financial sponsor is usually found in a concession
agreement.

Total

1.00 /
1.00
Question Explanation

A dual role improves the efficiency of the incentive structure for the party involved as it will be
in its best interest to perform at its best in its industrial obligations in order to maximize its
returns as a sponsor.
Question 4
Which of the following criteria are positively affected by a larger number of banks in a
syndicate?
Your Answer

Score Explanation
Bargaining power of each invited bank
Inorrect 0.00

Return on invested capital for the MLA

Confidentiality of information

Total

0.00 / 1.00

Question Explanation

How many banks to invite? Numbers matter. A syndicate composed of a limited number of
financing institutions ensures a higher degree of confidentiality on the issuers information and
on the deal itself and implies a significant reduction both in coordination costs and in the timing
of the decision-making process. On the other hand, banks bear a greater risk because not all
invited parties will actually translate their interest into a capital commitment and hence in an
investment, and this may constitute a problem especially amidst market turmoil or in the case
less-standardized products are offered. Wider syndicates can indeed reduce risks for the banks
involved. However, wider syndicates bear higher coordination costs and more potential
confidentiality issues, as information is shared with more participants.
Question 5
Which of the following statements about the final take is true?
Your Answer

Score Explanation
Higher final take corresponds to higher return on invested
capital for lending banks
Inorrect 0.00

Lower final take signals confidence by the MLA on the
quality of the project

Higher final take corresponds to higher fees for lending
banks

Total

0.00 /
1.00
Question Explanation

In the case of syndicated loans, the bookrunners face another trade-off. In the general syndication
phase, the bookrunners have to decide what portion of the loan to sell in the market and what to
retain on their own balance sheet. Selling a high portion of the loan downloads a part of the
credit risk to third parties, frees liquidity and increases the return on capital employed. However,
if too large a portion of the loan is sold it may be send a wrong signal to the market, i.e. that the
bookrunners do not want to keep skin in the game. A higher percentage of the loan kept onto
the bookrunners balance sheet has also the positive effect of driving the bookrunners to monitor
the borrower more closely during the life of the loan. It is worth noting that sometimes the
borrower asks the banks a commitment to hold without selling or a commitment to sell portions
of the loan only after the issuers consent.
Question 6
Focus on the following case of a dual stage syndication strategy. A loan of 600 mil is granted
under the following conditions:
Total fees: 1.2%
Co-arranging fees: 0.8%
Upfront management fees: 0.3%

The Co-Lead Arranger (Y) underwrites a total amount of 300 mil and finances 100 mil. Two
additional Manager banks (X and Z) provide respectively 250 mil and 150 mil.

Who is getting the largest return on invested capital?
Your Answer

Score Explanation
Mandated Lead Arranger (W)

Co-Lead Arranger (Y)
Inorrect 0.00

Manager Bank (Z)

Manager Bank (X)

Total

0.00 / 1.00

Question Explanation

Return on invested capital is computed for each bank by comparing the fees it is entitled to with
respect to the amount of the loan actually financed. The final take of the MLA can be recovered
as the residual of the total amount of the loan that is not financed by other banks: it is equal to
100 mil (600 mil - 100 mil - 250 mil - 150 mil). ROI is then 3.3% (3.3 mil / 100 mil) for
the MLA; 2.7 % for the CLA; and 0.3% for both Manager Bank (X) and (Z).
Question 7
What kind of risk does the direct agreement address?
Your Answer

Score Explanation
Supply risk

Counterparty risk
Correct 1.00

Construction risk

Political risk

Total

1.00 / 1.00

Question Explanation

The direct agreement allows creditors to replace any contractual counterparts of the SPV which
is unable to perform as agreed. It then relates to counterparty risk.
Question 8
Which of the following is false of a TKCC?
Your Answer

Score Explanation
It includes a provision for the payment of damages if
performance is not in line with an originally agreed minimum
standard tested by an independent technical engineer at
completion.
Inorrect 0.00

It defines a specific provision for a maximum cap of costs
above which any extra cost is paid for by the contractor.

The contractor only commits to provide its best effort.

Total

0.00 /
1.00
Question Explanation

With the TKCC agreement the contractor agrees to build the infrastructure for a pre-defined
price. Any extra cost above this maximum cap is paid for by the contractor. Moreover, it
includes a specific provisions for the damages the contractor has to pay in case of delay in
construction, proportional to its length. As such, it is usually backed by a bank guarantee.
Question 9
Which of the following is true of a Take or Pay agreement?
Your Answer

Score Explanation
If the buyer does not withdraw from the production it is
required to find alternative buyers on the retail market.

The SPV commits to provide supplies to the buyer who is
unconditionally required to pay the predetermined price even if it
is not able to withdraw from the production.
Correct 1.00

If the buyer does not withdraw from the production it does not
pay the price and the SPV is free to sell the product on the retail
market.

Total

1.00 /
1.00
Question Explanation

Under a Take or Pay Agreement, a buyer commits to purchase at a pre-defined dates for a fixed
price a certain quantity of the output of the SPV. It is unconditionally required to pay the
predetermined price even if it is not able to withdraw from the production.
Question 10
Which of the following is a typical direct investment during the construction phase?
Your Answer

Score Explanation
Operational & Maintenance Fees

Capitalized Commitment Fees

Development costs
Correct 1.00

Total

1.00 / 1.00

Question Explanation

The price of the construction contract is only one of the components of the overall investment,
and it is the simplest to quantify. In fact, this figure is specified in the turnkey construction
contract. Seeing that this contract is normally signed only when the project development phase is
complete, it is not unusual for the price to be changed in the interim. Along with the cost of the
turnkey contract, other values that need to be estimated for the financial model are the following:

Cost of purchasing the land where the facility will be built
Owners costs
Development costs
Question 11
Which of the following statements about the base facility is correct?
Your Answer

Score Explanation
It is the funds provided by lenders as a revolving credit
facility.

It is the equity funds provided by shareholders to finance the
construction phase's advancement.

It will be repaid from the cash flows the project generates in
the operational phase.
Correct 1.00

Total

1.00 /
1.00
Question Explanation

Speaking about senior debt in a general manner oversimplifies project finance deals, given that
banks make various tranches to the SPV available each of these tranches is intended to finance
part of the projects needs and is utilized and repaid in different ways. The majority of the
financing constitutes the base facility that covers plant construction and start operations.
Question 12
Which of the following statements about the VAT loans is correct?
Your Answer

Score Explanation
The lower the sales, the sooner the VAT facility will be
repaid.

They are funds used to finance the exposure of the VAT
accrued during the construction phase of the project.
Correct 1.00

Interest and financial costs on the VAT facility are capitalized
during the operational phase.

Total

1.00 /
1.00
Question Explanation

The early years of the project will concern the construction stage, during which initial
development costs are incurred. If the project takes place in a country where VAT is in force and
VAT reimbursement times are long, then the SPV will be entitled to a tax credit but will not be
able to recover it from VAT on sales (given that the project will start to produce revenue only
after the construction stage and not before). And so cash will be needed to finance VAT paid on
construction and development costs. A specific VAT facility is granted by the pool to the SPV to
cover VAT requirements during the construction phase. Clearly the VAT facility will be repaid
from VAT receipts during the operating phase. For instance, if during the first year of operation
the project generates sales of 100 with a VAT rate of 20%, then cash flow from sales will be 120,
of which 20 will be used to repay the VAT facility. So the higher the sales, the sooner the VAT
facility will be repaid. The spread requested for the VAT facility is lower than that applied for
the previous tranches.
Question 13
Consider the following project:

Project's Value: $300mil
Project amortized 20% per year
Loan: $150mil, 5% fixed rate amortized in constant Principal repayments: 5 years
(y0,y1,y2,y3,y4,y5)
Tax: 50%
EBITDA in the first five years (operating life) is equal to $100mil

What is the outstanding debt at y2?
Your Answer

Score Explanation
$90
Correct 1.00

$75

$60

Total

1.00 / 1.00

Question Explanation

Year: 0; 1; 2; 3; 4; 5
Outstanding Debt: 150; 120; 90; 60; 30; 0
Question 14
What is the rate creditors use to discount UFCFs to their present value in order to compute
LLCR?
Your Answer

Score Explanation
Creditor's cost of funding

Base rate

Interest rate on loan/bond
Correct 1.00

Total

1.00 / 1.00

Question Explanation

For consistency with the nature of cash flows being discounted and the focus on project
sustainability from the point of view of creditors expected UFCF need to be discounted using the
interest rate on corresponding loan/bond.
Question 15
Consider the following stream of UFCF:
UFCF:
y1: 57.5
y2: 58.8
y3: 61.6
y4: 88.5
y5: 89.1

You have an outstanding loan of 200 that pays an annual interest rate of 10% and is repaid in 5
years according to this repayment schedule:
y1: 15%
y2: 15%
y3: 15%
y4: 25%
y5: 30%

which gives the following stream of Principal Repayments:
y1: 30
y2: 30
y3: 30
y4: 50
y5: 60
and the following stream of Interest Expenses:
y1: 20
y2: 17
y3: 14
y4: 11
y5: 6

Indicate the year in which DSCR is maximum.
Your Answer

Score Explanation
Year 4
Correct 1.00

Year 1

Year 2

Year 3

Year 5

Total

1.00 / 1.00

Question Explanation

DSCR is computed each year as the ratio of the corresponding UFCF over the sum of interest
and principal payments. According to the stream of cash flows provided and the schedule of
principal repayments the highest level of DSCR is reached in year 4 when it is equal to 1.5.
Question 16
Consider the following stream of UFCF:
UFCF:
y1: 57.5
y2: 58.8
y3: 61.6
y4: 88.5
y5: 89.1

Compute LLCR at year 0, for an outstanding loan of 200 that pays an annual interest rate of 10%
and is repaid in 5 years.
Your Answer

Score Explanation
LLCR between 1 and 1.5
Correct 1.00

LLCR above 2

LLCR below 0

Total

1.00 / 1.00

Question Explanation

LLCR is computed as the ratio of the present value of future UFCF generated during the entire
life of the loan over the total amount of debt outstanding. The present value each UFCF
discounted at year 0 on the basis of the interest rate of the loan is equal to 262.32 and the LLCR
then equals 1.31.
Question 17
Which among the following statements is correct?
Your Answer

Score Explanation
The fact that early in the operational phase creditors generally
require a portion of the cash generated by the project is kept inside
the vehicle does not affect the IRR of shareholders.

To obtain equity financing the project needs to comply with a
minimum predefined level of cover ratios, that is set according to
project risk.

If a sponsor plays a dual role the relevant cash flows to be
taken into consideration for the estimation of the IRR should also
include any additional profit margin the sponsor can get out of the
project as a counterparty of the SPV itself.
Correct 1.00

Total

1.00 /
1.00
Question Explanation

In order for a project to be financed it has to be profitable for both sponsors and creditors. A
project profitability is measured in terms of IRRs on the basis of equity and debt contributions
and the corresponding cash flows they are respectively entitled to (i.e. dividends plus any other
profit margin from a dual role or debt service). In addition, creditors need also to assess the
project financial sustainability on the basis of cover ratios that indicate whether during the life of
the loan there is always enough cash in the project to fulfill debt obligations.
Question 18
Which of the following statements about Positive Covenants is correct?
Your Answer

Score Explanation
Positive Covenants oblige the project company to do certain
things.
Correct 1.00

Positive Covenants are obligations forbidding to buy assets or
sign contracts not included in the list of project contracts approved
by lenders.

Positive covenants are obligations forbidding to grant credit or
provide guarantees to third parties.

Total

1.00 /
1.00
Question Explanation

Positive covenants oblige the project company to do certain things.
Question 19
Which of the following statements about project companys covenants is correct?
Your Answer

Score Explanation
They can be defined as the basic obligations only focusing on
the repayment by the borrower of the amount due on the agreed
maturity date.

They are limitations established by lenders on borrowers
which the latter must respect in order to draw down the funds
made available by lenders.
Correct 1.00

They are obligations directly and only correlated to the loan
repayment.

Total

1.00 /
1.00
Question Explanation

A somewhat narrow view of lending activity could lead us to conclude that in a credit agreement
the only thing the borrower is expected to do is to pay lenders their dues at maturity. In fact,
nothing can change the fact that this is and always will be the primary obligation of every
borrower. In a project finance context, however, it is completely normal, and indeed necessary,
for the borrower to take on a complex, detailed set of obligations toward lenders that are
ancillary to both the obligation to repay and to the financing in general. These obligations may
be either correlated to loan repayment (if the project company does not take certain actions, by
definition it will not be able to repay the loan at the schedule maturity dates) or required by
lenders in order to monitor their credit investment and verify that it is being managed properly.
Question 20
Consider a tailor made loan repayment, assume that we are at the end of the construction phase.

Total amount of the loan to be repaid is equal to 340 .
Interest rate is fixed at 5%.
The repayment is scheduled in four years as follows:
Y1 =20% (the end of the first year)
Y2 =21% (the end of the second year)
Y3 =24%
Y4 =35%

What is the loan amount repaid by the end of year 2 (Y2)?
Your Answer

Score Explanation
71.40

139.40
Correct 1.00

83.40

Total

1.00 / 1.00

Question Explanation

Year: 1; 2; 3; 4
% of repaid loan: 20%; 21%; 24%; 35%
UFCF: 100; 105; 115; 125
Debt Service: 85; 85; 91.63; 124.95
Outstanding: 340; 272; 200.6; 119; 0
Interest 5%: 17; 13.6; 10.03; 5.95
Principal: 68; 71.4; 81.6; 119
Repaid: 68; 139.4; 221; 340