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Lecture Notes - Due Diligence

Due diligence in project finance involves thoroughly reviewing all aspects of a proposed deal. This includes assessing the promoter's background, evaluating the business model and financial projections, conducting legal reviews, analyzing financial statements and risks, and ensuring appropriate trust and retention mechanisms are in place to protect lenders. The key areas of focus for due diligence are the promoter history, business model, legal agreements, financial analysis, and establishing debt repayment and reserve structures.

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145 views9 pages

Lecture Notes - Due Diligence

Due diligence in project finance involves thoroughly reviewing all aspects of a proposed deal. This includes assessing the promoter's background, evaluating the business model and financial projections, conducting legal reviews, analyzing financial statements and risks, and ensuring appropriate trust and retention mechanisms are in place to protect lenders. The key areas of focus for due diligence are the promoter history, business model, legal agreements, financial analysis, and establishing debt repayment and reserve structures.

Uploaded by

Himanshu Dutta
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© © All Rights Reserved
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Project Feasibility

&Finance

www.greybricks.com
Due Diligence
• In the project finance business, deal origination happens by the
direct relationship that relationship managers across different
sectors enjoy in the industry.

• Proposals are presented in the form of appraisal notes put up to


either the credit committee or a committee of senior
management, whichever is the appropriate sanctioning authority.

• Due diligence in project finance involves thoroughly reviewing all


proposals involved in a deal.
Appraisal Note
• An appraisal note ideally contains:
– a write up on the company background,
– its management and shareholding pattern,
– its physical and financial performance,
– purpose of funding
– details of project being funded
– costs involved and means of financing
– market for company’s products
– future prospects and profitability projections
– risk analysis
– and the terms and conditions of sanction.
Due Diligence
• Due diligence in project finance is a process that consists of
multiple steps to ensure the most comprehensive analysis:
– Assessment of promoter history and background
– Evaluation of the company and project business model
– Legal due diligence
– Analysis of financial statements and structure
– Determine major risks associated with the project
– Analysis of tax effects
– Credit analysis and evaluation of loan terms
– Project valuation
Due Diligence – Key Focus Area
• Assessment of promoter history and background
– Assessment of group companies
– Track record of sponsors
– Management profile of sponsor companies
– Study of shareholder agreement (voting rights,
representation of Board of Directors, clauses pertaining to
protection of minority interest, dispute resolution etc.)
– Analysis of tax effects
– Management structure of project company
Due Diligence – Key Focus Area
• Evaluation of the Company and Project Business Model
– Understanding the assumptions
– Assessment of the assumptions
– Analysis of project cost
– Sensitivity analysis
– Benchmarking with the industry
Due Diligence – Key Focus Area
• Legal Due Diligence
– Determining the rights and liabilities of the different
participants within the project scope
– Analyzing the schedule and implementation plan of the
project
– Evaluating the appropriateness of liquidated damages if
the project fails to deliver as promised
Due Diligence – Key Focus Area
• Analysis of Financial Statements and Structure
– Debt equity ratio
– Principal repayment schedule
– Sinking fund build up - Build-up of a sinking fund or Debt
Service Reserve Account is usually established in order to
safeguard the lenders’ interests. Such a fund entails
deposit of a certain amount in a designated reserve
account which is used towards debt servicing in the event
of a shortfall in any year/quarter of the debt repayment
period.
Due Diligence – Key Focus Area
• Analysis of Financial Statements and Structure (continued)
– Trust and retention mechanism - Safeguard the lenders’ interest.
• The mechanism entails all revenues from the company to be
routed to a designated account.
• The proceeds thus credited to the account are utilized
towards payment of various dues in a predefined order of
priority.
• Generally, the following waterfall of payments is established:
statutory payments including tax payments, operating
expenditure payments, capital expenditure payments, debt
servicing, dividends and other restricted payments.

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