[August 2023] 1 minute speech : Project Finance vs Corporate Finance

[August 2023] 1 minute speech
 
Title : Project Finance vs Corporate Finance

Link : https://youtu.be/mbjnlycN_V0

Time : 0:00~4:11

1. Script
What is project finance?
Real-estate development is a classic example of project finance. What is project finance? Simply put, it's just a long-term financing of an independent capital investment. And when I say an independent capital investment, what I mean by that is it's a project that can be distinctly isolated where you can see the cash flows and the assets that are contained together.And a financing that's put around those is particularly them as opposed to say a company that may be a huge collection of project finance or operating assets all combined. So the cash flow has to be sufficient to cover the operating expenses and to fund the financing repayment requirements because it's a standalone entity. There's not there's no other source of cash flow that can help repay the financing, and typically the financing is made up of debt and equity. But in particular, it's matched to the life of the asset. So if you're building a mine, a goldmine that's 15 years, you're going to try to match your financing to that. If you're building something that has a life of a hundred years like a railway or toll road, you're going to match your financing to that. 
Examples - project finance
So examples of project finance include mining, oil, and gas when you're talking about a particular asset, one mine or one oil field for example. It also includes buildings and construction, so real estate development is a prime example of that where it's an isolated economic development that can then be sold. It's self-funding, and all of the economics are contained within this opportunity. 
Project versus corporate finance
So how does that compare to corporate finance? When a corporation is undergoing investment, it has the ability to use cash flow from other operating activities to fund it. It also has the ability to use its general creditworthiness or its credit rating to borrow money and fund that project. It doesn't have to isolate the project necessarily and get funding based on that project alone. So issuing equity with an indefinite time horizon is something that corporations can often do and do do, whereas equity that's issued with a corporate finance investment typically has a life to it. So, for example, there's a specific project that has a time horizon for the equity, and the equity will be repaid at the end of that time horizon. 
Capital stack
When it comes to funding project finance, the capital stack has several considerations. The first thing is draws. In the case of this real estate financial modeling, we're going to have a draw on a construction loan. We're going to have to look at security and priority for other lenders in the capital stack. We're going to have to carefully structure the term so that the term matches the length of time it would take to develop and sell this project. We'll then have to analyze the trade-off between fixed and floating interest rates and give careful consideration to pricing around the equity. So when we look at the capital stack together, we've got three components: the riskiest at the bottom is equity, in the middle we've got subordinated debt, and then at the top, the most secure, we have senior debt. Later in the course, we're going to always be referring back to this capital stack. We're going to be talking about various stages of real estate development and various types of capital associated with each stage. So we'll be referring back to senior debt, subordinated debt, and equity throughout this course. If you'd like a little more detail on the capital stack and various types of financing that are out there, please take our introduction to corporate finance course. It's offered on our website for free and will give you all the background you need on various types of finance activity. Now let's move on to the next step.

2. Summary
Project finance involves securing long-term funding for specific capital investments, such as real estate. Unlike corporate finance, it focuses on isolated projects with distinct cash flows and assets. The financing structure combines equity and debt in a capital stack, considering factors like draw schedules, security, and term matching. This approach ensures that project-specific income covers operating costs and repayment. Senior debt, subordinated debt, and equity form the capital stack, each with different levels of risk. This financing method is essential for successful real estate development.

 

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