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PROJECT FINANCE GLOSSARY

Glossary F-L
Glossary M-R
Glossary S-Z

 

acceleration:

After a default, the loan is fully due and payable. Repayments are accelerated to the present.

ad valorem:

Off the gross or stated value, usually a percentage.

ADB:

Asian Development Bank.

advance:

A loan drawdown is advanced by the funder.

agent:

The bank charged with administering the Project Financing. Generic: A party appointed to act on behalf of a principal entity/person.

All-in:

Interest Rate which includes Margin, Commitment Fees, up-front fees.

Amortisation:

Reduction of capital or up-front expenses (capitalised) over time, often an equal amount p.a. Sometimes describes Repayments.

Annuity:

The sum of Principal and Interest is equal for each period.

arbitrage:

Take advantage of discrepancies in price or yields in different markets.

Arranger :

The senior tier of a Syndication. This implies the entity that agreed and negotiated the Project Finance Structure. Also refers to the bank/underwriter entitled to Syndicate the loan/bond issue.

Asset:

The physical project and its associated contracts, rights, and interests of every kind, in the present or future, which can be valued or used to repay Debt.

Assignment :

Grant of the right to step in to the position of a party to a contract or legal agreement.

audit:

An independent examination of the financial statements or project studies/projections.

Availability:

The Project Financing is available for drawdown. A period prior to Financial Close may also be included.

Available cashflow:

Total cash sources less total cash uses before payment of Debt Service.

Average Life :

Average for all repayments, usually weighted by amounts outstanding.

avoided cost:

The capital and expense that would otherwise have to be spent if the project did not proceed.

balance sheet:

The accounts which show Assets, Liabilities, Net Worth/Shareholders’ Equity.

Balloon:

A large single repayment 0f principal.

BAR

Builders’ All Risk, a standard construction insurance.

Barter:

The physical form of countertrade.

Basis

The benchmark interest rate or level such a US Prime or LIBOR.

Basis Point (bp):

One hundred bp equals 1 percentage point.

BATRI

Borrower, Amount, Term, Repayment Method, Interest Basis + Margins - a way of summarising the term sheet.

Bearer Bond:

The Bond certificate is itself Negotiable. (It is not recorded as being owned by any particular Investor.)

best efforts:

A very high standard of undertaking, nevertheless excusable in the event of force majeure or failure to execute the matter in question after trying to do so on a sustained, dedicated basis. Under English law, "best endeavours" is a preferable term.

BI

Business interruption insurance available once the project is in business.

Bid Bond:

A small percentage (1-3%) of the tender contract price is established as a bid "performance" bond. Once the contract is awarded, Bid Bonds are refunded to the losers.

Blocked Currency:

Due to Inconvertibility or Transfer Risk, a currency cannot be moved out of the country.

Bond:

The paper evidence of a legal promise by the Issuer to pay the Investor on the declared terms. Bond are usually Negotiable. Bonds are customarily longer-term, say 5-25 years. Short-term bonds are usually referred to as Notes.

BOO:

Build Own Operate (and Maintain).

Book Runner:

The Arranger or bank extending the invitations for a Syndication and tallying Final Take.

BOT:

Build Own Transfer where the project is transferred back to the party granting the concession. The transfer may be for value or at no cost.

Break Even:

The reduction of a Project Finance Net Cash Flow to zero by changing an input variable such as price or costs.

broker:

A party which brings together sponsors, finance, or insurances but is not acting as a principal.

Builders-All-Risk:

The standard insurance package during construction.

Bullet:

A one-time repayment, often after no /little Amortisation of the loan. A balloon.

Buy-back:

A promise to repurchase unsold production. Alternatively, a promise to repay a financial obligation.

buydown:

A once-off payment out of LDs to reflect cashflow losses from sustained underperformance. Often used to "buy" down the Project Finance loan.

Buyer Credit:

A financing provided to a buyer to pay for the supply of goods or services usually by an exporting country or the supplier company.

Call:

An option to buy a Security or commodity for a set price at a given time in the future.

cap:

A ceiling on an interest or FX rate through a swap, options, or by agreement.

Capex:

Capital Expenditures usually by way of direct investment.

Capital markets:

A broad term to include tradeable debt, securities, and equity as distinct from private markets or banks.

Capitalised Interest:

Prior to Completion, the convention is to capitalise interest into the Project Financing ie. to borrow to pay Interest. See IDC.

Cashflow:

The generation of cash by a Project.

CDC:

Commonwealth Development Corp, a British development finance institution.

Charge:

Under Crown Law, the document evidencing mortgage security. A Fixed Charge refers to a defined set of Assets and is usually registered. A Floating Charge refers to other Assets which change over time eg. Cash, Inventory, etc which become a Fixed Charge after a Default.

Claw Back:

The ability to recover prior Project Cashflow that may have been distributed/paid away as dividends to the Sponsors.

club:

A group of underwriters who do not need to proceed to Syndication.

Co-financing:

Where the different lenders agree to fund under the same documentation and security packages yet may have different interest rates, repayment profiles, and term, perhaps via A and B tranches.

Co-Manager:

A second-tier Participant, ranked by size of participation.

Coface:

The French ECA.

Cogeneration:

Besides electricity, another energy is produced and sold from the waste heat from a power plant, eg. steam, hot air, refrigeration.

collar:

A ceiling and floor to an interest or FX rate structured through swaps, options, hedging, or by agreement.

Collateral :

Additional Security pledged to support a Project Financing.

Combined Cycle:

The waste heat from an electric generation unit is recovered as steam which is used to generate more electricity through a steam turbine.

Commitment Fee:

A per annum fee applied to the portion of the unused Project Financing (the amount not yet drawn down) until the end of the Availability period.

Commitment letter

A formal letter offering an underwriting on a given set of terms and conditions, including interest basis/margin and fees.

Compensation Trade:

The form of countertrade where an incoming investment is repaid from the units / revenues generated by that investment.

Complementary Financing:

Where different lenders agree to fund under similar yet parallel documentation and a pro-rata security package.

Completion:

In a Project Financing, when the Project’s Cashflows become the primary method of repayment. It occurs after a Completion Test. Prior to Completion, the primary source of repayment is usually from the Sponsors or from the Turnkey Contractor.

Completion risk:

Construction, development, or cost overrun risk. The risk that a project will not be able to pass its Completion Test.

Completion Test:

A test of the Project’s ability to perform as planned and generate the expected Cashflows. The time when the Project can move from Recourse to a Project Financing.

Compound:

Interest is reinvested to earn additional interest in the following period.

Consortium:

All of the Participants or developers. For the early stages of a Project, it may be a loose association, not a legal or contractual entity/JV.

Contingency:

An additional amount/percentage to any Cashflow item eg. Capex. Care is needed to ensure it is either ‘to-be-spent’ or a Cushion.

Contingent:

For liabilities, those that do not yet appear on the Balance Sheet - guarantees, supports, lawsuit settlements. For support or Recourse, the trigger may occur at any time in the future.

Convertible:

A financial instrument that can be exchanged for another Security or equity interest at a pre-agreed time and exchange ratio.

constant dollar:

Inflation or escalation is not applicable. Prices and costs are deescalated/reescalated to a single point in time.

counterparty:

The other participant, usually in a swap or contract and includes intermediaries.

countertrade:

One party supplies a unit / funding in return for other material/funding. See Barter.

country risk:

Includes sovereign risk but usually an estimate of the likelihood of a country debt rescheduling which will prompt currency Inconvertibility. Sometimes referred to as sovereign risk.

Coupon:

The Interest amount or rate payable on a Bond. A coupon may be physically attached to the Bond certificate.

Covenant:

An agreed action to be undertaken (Positive) or not done (Negative). A breach of a covenant is a Default.

Cover:

The amount above unity of a Debt Service ratio.

CPI:

Consumer Price Index, a measure of inflation at the consumer level.

Crack spread

A refinery hedging the oil intake and product (mix) of output results in a crack spread roughly equivalent to the gross refinery margin.

Credit Enhancement:

The issuance of a Guarantee, L/C, or additional Collateral to reinforce the credit strength of a Project Financing.

creditworthy:

The risk of default on a Debt obligation by that entity is deemed low.

Cross default:

A default by another project participant or by the Sponsor (other than the Project Financing) triggers a Default.

Cross-Collateral:

Project Participants agree to pool Collateral ie. allow Recourse to each other’s Collateral.

Crown Law:

Law derived from English law, eg. England, Ireland, Canada, PNG, Australia, Hong Kong, Singapore, India, Malaysia.

cure:

Make good a Default.

Current Asset:

Cash or Assets that can be converted to cash within one year.

current dollar:

Actual or real prices and costs. Escalation/inflation effects are included.

Current Liabilities:

Liabilities payable within one year.

Current Ratio:

Current Assets divided by Current Liabilities (a Liquidity ratio).

Cushion:

The extra amount of Net Cashflow remaining after expected Debt Service.

D:E Ratio:

The amount of Debt as a ratio of Equity, often expressed as a percentage.

DCF:

Discounted Cash Flow where Net Cashflow is brought to a Present Value using a given percentage Discount Rate.

Debenture:

A legal security over the Issuer’s general credit / balance sheet.

debottle-necking:

Each transition of a project’s flowsheet or sequence is optimised to increase output. This may require minimal Capex.

Debt Service:

Principal Repayments plus Interest Payable; usually expressed as the annual dollar/currency amount per calendar or financial year.

Debt:

The obligation to repay an agreed amount of money.

D:E Swap:

Debt in a blocked currency is swapped for equity in a local company / project, usually at a discount.

deductible:

An amount or period which must be deducted before an insurance payout or settlement is calculated.

Default Interest:

A higher interest rate payable after Default.

Default:

A Covenant has been broken or an adverse event has occurred. A Money Default means a repayment was not made on time. A Technical Default means a Project parameter is outside defined/agreed limits or a legal matter is not yet resolved.

defeasance

Some or all of the debt is cash collateralised usually indirectly or via Zero-coupon structures

Deficiency Agreement:

Where cashflow, working capital, or revenues are below agreed levels or are insufficient to meet Debt Service, then a deficiency or Make-Up agreement provides the shortfall to be provided by the Sponsor or another party, sometimes to a cumulative limit.

Deficiency:

The amount by which Project Cashflow is not adequate for Debt Service.

defined event:

The definition applicable to the trigger of a loss in an insurance policy, particularly PRI.

Depreciation:

Amortisation for accounting (book), tax calculations, or Income calculations. A regular reduction in asset value over time.

derivative:

A financial instrument based on an underlying contract or funding such as a swap, option or hedge.

Devaluation :

Either a formal reduction in the FX rate or gradually according to FX

market forces.

DIS

Delay-in-Startup insurances which can cover all non-site force majeures, change in a law, and contingent contractor liability (Efficacy). Sometimes called Advanced Loss-of-Profits Insurances or Advanced Business Interruption Insurance.

Discount Rate:

The annual percentage applied to NPV or PV calculations (and is often the All-in Interest Rate or the Interest Rate plus Margin for Project Financing). The Discount Rate may be the WACC.

Dividend:

The amount paid out per share, usually once or twice a year, by a company from its profits as decided by the board of directors.

Double Dip:

Tax depreciation is accessed in two countries concurrently.

Drawdown:

The Borrower obtains some of the Project Financing, usually progressively according to Construction expenditures plus IDC.

drop-dead:

A fee payable when the underlying transaction does not proceed.

DSCR:

Debt Service Cover Ratio; usually annual.

Earnings:

Net Income, Net Profit

EBRD:

European Bank for Reconstruction and Development targeted at Eastern Europe and the former Soviet Union, an MLA.

ECA:

Export Credit Agency established by a country to finance its national’s goods, investment, and services. They often offer PRI.

ECGD:

Export Credit Guarantee Dept., the UK ECA.

EDC:

Export Development Corp., Canada’s ECA.

EFIC:

Export Finance Insurance Corp., Australia’s ECA.

EIS:

Environmental Impact Statement which may have been subject to public comment.

Engineering risk:

Design risk. The impact on project cashflow from deficiencies in design or engineering.

Environmental risk:

Economic or administrative consequence of slow or catastrophic environmental pollution.

Equity:

In a Project Financing, the cash or Assets contributed by the Sponsors. For accounting, it is the Net Worth or Total Assets minus Liabilities.

Escrow:

Where documents or money accounts are put beyond the reach of the parties.

Eurobonds:

Bonds issued in any currency and are commonly listed in Luxembourg. They cannot be traded in the USA. Eurobonds are often Bearer Bonds.

Eurodollar:

US$ deposited with banks outside the USA.

evergreen:

A contract that rolls over after each agreed (short-term) period until cancelled by one party.

execute:

Formal signing of documentation. Implement an action required under the documentation.

Expropriation:

The state has taken over a company or project, implying compensation will be paid. Nationalisation. Creeping expropriation occurs when a government squeezes a project by taxes, regulation, access, or changes in law.

 

 

International Advisory & Finance 1999

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