assignment PROJECT FINANCING & SUSTAINABILITY

assignment PROJECT FINANCING & SUSTAINABILITY - MOUNT...

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MOUNT KENYA UNIVERSITY BACHELOR OF DEVELOPMENT STUDIES BED4204-PROJECT FINANCING & SUSTAINABILITY ASSIGNMENT INSTRUCTIONS: ANSWER ALL THE QUESTIONS 1. Differentiate between non-recourse project financing and limited recourse project financing (4 marks) Nonrecourse means that the lender may not turn to the sponsor’s non-project related assets if the revenues generated by the project, SPE, or project collateral used to secure the loan are insufficient to cover the principal and the interest payments on the loan. The lender has recourse only to the project not the sponsor. A non-recourse loan is defined as a loan where the borrower or guarantors are not personally liable for repaying any outstanding balance on the loan. Non- recourse financing is typically found on longer term permanent commercial real estate loans placed on a stabilized and performing asset. However, a common misconception with non- recourse loans is that if a loan is non-recourse then a borrower or guarantor can never be held personally liable in the case of a loan default. This is not always true and there are several exemptions commonly covered under what’s known as carve out provisions or the bad boy guaranty. Limited recourse means that the sponsor remains liable for certain risks that the lenders are unwilling to accept. These could be the cost over-runs during construction, or the sponsor could take construction completion risk by remaining liable on the construction loans, with only the term (post construction) loans being nonrecourse. To support nonrecourse or limited recourse financing, typically require: SPE a special purpose entity. Separateness covenants to mitigate consolidation of SPE if there is a bankruptcy of a sponsor. The definition of a recourse loan is a loan where the borrower or guarantors are personally liable for repaying any outstanding balance on the loan, in addition to the collateral itself. In other words, if the collateral securing a loan needs to be liquidated but is insufficient to cover the total amount owed on the loan, then “recourse” enables the lender to go after the guarantors personally to cover this deficiency. Full
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recourse loans are common with construction and other shorter term commercial real estate financing, such as a mini-perm loan that finances lease up and stabilization of an asset. 2. Briefly discuss the rationale for undertaking a project through project financing (4 marks) BENEFITS OF PROJECT FINANCE Project finance as a method of infrastructure development is attractive to stakeholders for a number of reasons peculiar to each stakeholder.
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