Project Finance
(FIN338)
Assignment
Total marks: 100
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Instructions to students
• This assignment covers Topics 1 to 6 and accounts for 40% of your final grade.
• There are four (4) questions in this assignment. You should answer all questions.
• You are required to conduct research beyond the FIN338 subject materials to assist you in answering some of the assignment questions.
• The overall word limit for the assignment is 3500 words. Marks will only be awarded for answers up to the word limit (plus 10%) for each question. Any material written after this will not be counted towards your mark for that question. Headings, quotes and references within the body of the answer are included in the word count. Numerical tables, calculations, and reference lists are not included. For more information on word counts and their rationale, go to Assessment ? Assignment ? General assessment information.
• Refer to the Criteria-based Marking Guide for guidelines on what is expected for each question.
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• Answers are to be in your own words. Reference and cite all your sources (within the text of your answer) when quoting or using material from external sources. Include a reference list at the end of your assignment. Refer to the ‘Referencing and Citations Guide’ available from the ‘Library and Resource Centre’ in KapLearn for further information on referencing.
• Indicative weightings are noted beside each question. Use these weightings to assist you with your allocation of time and resources. The weightings indicate the relative importance of each question.
• State all assumptions used in providing your answer.
• Requests for special consideration or information pertaining to special consideration written in the body of the assignment will not be considered by the marker. Refer to the ‘special consideration’ section of the Assessment Policy on Kaplan’s website for more information.
Learning outcomes (LO) mapping Marks
1. Assess project viability. 46
2. Evaluate economic and financial cash flow models to analyse project risk. 39
3. Discuss the need for specialist input when required. 0
4. Develop the appropriate financial structure for a project. 15
5. Determine a project finance arrangement which meets client needs and reflects the current market climate. 0
6. Develop project documentation and syndication. 0

Total marks 100
Criteria-based Marking Guide
The Criteria-based Marking Guide provided at the end of each question is designed to assist students to understand what is expected of them in each question and to let them know how their performance will be judged. It provides advice about the criteria used in the marking of the question and what discriminates between an excellent, satisfactory and unsatisfactory answer.
Introduction — Lake Bonney Wind Power Pty Ltd
Assume you are a member of the project finance unit of an Australian bank. It is June 2003 and you have been asked to review the information memorandum relating to a $165.6 million project finance facility for the Lake Bonney Wind Farm project. You are required to prepare an issues paper as part of a credit submission to participate in the financing.
As a potential participant in the financing, you are not in a position to alter technical aspects of the project, but you may be able to request amendments to the financing terms and conditions as a requirement for lending.
General instructions
• Lake Bonney Wind Power Pty Ltd information memorandum can be downloaded from the ‘Assignment’ page in KapLearn.
• The assignment requires a detailed understanding of the information memorandum. Credit officers do not appreciate having to read general project finance theory, so theoretical answers that are not related to the specific project being evaluated will be ignored.
• The attachments referred to in the information memorandum have not been included as part of the material for this assignment.
• The principal contracts (section 10 of the information memorandum) have been agreed and executed and are not able to be altered by the financiers.
• For the purposes of the assignment, assume the electricity prices contained in sections 10.1 and 13.3 are $40/MWh for the Power Purchase Agreement (PPA) and $40/MWh for the Green Power Rights.
• For the purposes of this assignment, events subsequent to June 2003, including government policies and movements in interest rates and power prices, should be ignored.
• Assume financial close has not occurred at the time of your review.
Important note: Please note the confidentiality requirements contained in the information memorandum. This material has been provided on the basis that it will be used solely for study purposes. Students are not to disclose the material to other persons or use the material for other purposes. Some sensitive information not relevant to the assignment has been deleted from the information memorandum. Lake Bonney Wind Power Pty Ltd or any other organisations mentioned in the information memorandum should not be contacted under any circumstances. The resource material and assumptions supplied plus other publicly available information are sufficient to fully answer the assignment questions.
Question 1 (39 marks | Word limit: 1200 words)
LO2: Evaluate economic and financial cash flow models to analyse project risk.
(a) Review section 14 of the information memorandum.
(i) Analyse five (5) key risks contained in the information memorandum associated with the project that may impact the debt facility during the term of the financing. In your answer explain why you consider each a key risk. (10 marks)
Note: An in-depth analysis of the fundamental risks is required to answer this question. Answers must be more than a summary of the information memorandum. Key risks would be the risks that you judge to have the largest impact on the debt financing.
(ii) The Lake Bonney Wind Farm project was successful. However, the information memorandum does not discuss all relevant risks that affect the financing.
Explain three (3) additional risks associated with the project that may impact the debt facility during the term of the financing that are not specifically identified in section 14. (9 marks)
Note: Remember that technical aspects of the project cannot be changed.
(b) Describe the mitigating factors that are included in the debt terms and conditions to reduce the risks identified in part (a)(i).
Hint: Review section 12.4 of the information memorandum. (10 marks)
(c) In order to better understand and mitigate the project risks identified in part (a), consider what additional information you would require that is not outlined in the information memorandum, or what changes you would make to the information memorandum. This information and these changes may relate to risks identified in either part (a)(i) or (a)(ii).
In your answer outline:
• the additional information you would require or research you would undertake prior to commitment
• the additional information you would include in, or changes you would make to, the terms and conditions of the financing.
Note: Your answer must focus on mitigating project risks. (10 marks)
Criteria-based marking guide for Question 1
Excellent Satisfactory Unsatisfactory
(a) (i) • 5 key risks identified from information memorandum
• comprehensive analysis of key risks
• comprehensive explanation of why you consider each risk a key risk • 5 key risks identified from information memorandum
• basic analysis of key risks
• basic explanation of why you consider each risk a key risk • less than 3 key risks identified from information memorandum
• no or little analysis of the key risks
• no or little explanation of why you consider each risk a key risk
(Mark range: 8–10 marks) (Mark range: 5–7.5 marks) (Mark range: 0–4.5 marks)
(a) (ii) • 3 risks identified which are not mentioned in the information memorandum
• comprehensive explanation of risks identified • 3 risks identified which are not mentioned in the information memorandum
• basic explanation of risks identified • less than 2 key risks identified which are not mentioned in the information memorandum
• no or little explanation of risks identified
(Mark range: 7–9 marks) (Mark range: 4½–6.5 marks) (Mark range: 0–4 marks)
(b) • 5 or more mitigating factors identified from information memorandum
• clear, substantiated and detailed explanation demonstrating how the mitigating factors reduce risks • 4 mitigating factors identified from information memorandum
• adequate explanation demonstrating how the mitigating factors included reduce risks • few or no mitigating factors identified from information memorandum
• little or no clear explanation demonstrating how the mitigating factors included reduce risks
(Mark range: 8–10 marks) (Mark range: 5–7.5 marks) (Mark range: 0–4.5 marks)
(c) • 3 or more correct pieces of desirable additional information identified
• 3 or more correct desirable changes to the terms and conditions of the financing identified • 2 correct pieces of desirable additional information identified
• 2 correct desirable changes to the terms and conditions of the financing identified • little or no additional information required identified
• little or no changes to the terms and conditions identified
(Mark range: 8–10 marks) (Mark range: 5–7.5 marks) (Mark range: 0–4.5 marks)
Answers to Question 1(a)–(c)
End of answers to Question 1(a)–(c)
Question 2 (20 marks | Word limit: 800 words)
LO1: Assess project viability.
(a) In order to evaluate the project, potential participants will require information in addition to what is contained in the information memorandum. Outline what other specific information (not including material contained in the attachments) you would require in order to evaluate the financing. (10 marks)
Note: Do not include the same information here as you considered in Question 1(c). In this question, you are required to consider broader information requirements to evaluate the financing.
(b) Explain why the additional information identified in part (a) is relevant. (10 marks)
Criteria based marking guide for Question 2
Excellent Satisfactory Unsatisfactory
(a) • 4 or more extra pieces of information required correctly identified in addition to those contained in the attachments to the information memorandum • at least 3 extra pieces of information required correctly identified in addition to those contained in the attachments to the information memorandum • little or no specific information in addition to the information memorandum identified
• only additional information contained in the attachments to the information memorandum identified
(Mark range: 8–10 marks) (Mark range: 5–7.5 marks) (Mark range: 0–4.5 marks)
(b) • comprehensive explanation of why the additional information identified in question 2(a) is relevant
• explanation specifically related to the Lake Bonney financing • basic explanation of why the additional information identified in question 2(a) is relevant • little or no explanation of relevance of additional information
(Mark range: 8–10 marks) (Mark range: 5–7.5 marks) (Mark range: 0–4.5 marks)
Answers to Question 2(a)–(b)
End of answers to Question 2(a)–(b)
Question 3 (26 marks | Word limit: 1000 words)
LO1: Assess project viability.
(a) Discuss the applicability and reasonableness of the base case assumptions and the range of sensitivity analyses contained in section 13 of the information memorandum. (10 marks)
(b) Explain what the sensitivity analyses indicate in relation to the project risks. (10 marks)
(c) Explain what additional sensitivities you would wish to review. (6 marks)
Criteria based marking guide for Question 3
Excellent Satisfactory Unsatisfactory
(a) • comprehensive discussion on the reasonableness and applicability of the base case assumptions
• comprehensive discussion on the reasonableness and applicability of the range of sensitivity analyses
• discussion points concise and answer logical and well structured • basic discussion on the reasonableness and applicability of the base case assumptions
• basic discussion on the reasonableness and applicability of the range of sensitivity analyses
• some discussion points not concise or well thought out and structured • little or no relevant or logical discussion on either the base case assumptions or the sensitivity analysis
(Mark range: 8–10 marks) (Mark range: 5–7.5 marks) (Mark range: 0–4.5 marks)
(b) • correct and comprehensive interpretation of the sensitivity analyses
• interpretation specific and focussed on the sensitivity analyses contained in section 13 of the information memorandum
• comprehensive explanation of what the sensitivity analyses indicate in relation to the specific project risks in the Lake Bonney financing • correct interpretation of the sensitivity analyses
• basic explanation of what the sensitivity analyses indicate in relation to the project risks • incorrect interpretation of the sensitivity analyses
• little or no explanation of what the sensitivity analyses indicate in relation to the project risks
(Mark range: 8–10 marks) (Mark range: 5–7.5 marks) (Mark range: 0–4.5 marks)
(c) • 3 or more relevant additional sensitivities identified
• comprehensive explanation of why you would wish to review the additional sensitivities and what these additional sensitivities would indicate • 2 relevant additional sensitivities identified
• basic explanation of why you would wish to review the additional sensitivities • no or little additional sensitivities identified
• no or little explanation of why you would wish to review the additional sensitivities
(Mark range: 5–6 marks) (Mark range: 3–4.5 marks) (Mark range: 0–2.5 marks)
Answers to Question 3(a)–(c)
End of answers to Question 3(a)–(c)
Question 4 (15 marks | Word limit: 500 words)
LO4: Develop the appropriate financial structure for a project.
(a) Identify specific terms of the proposed term debt facility (i.e. section 12) that cause you concern and explain why. (5 marks)
Note: Do not include the same terms discussed in Question 1(c).
(b) Explain why and how a separate construction debt facility is being used. (5 marks)
(c) Explain how the use of shareholder loans affects the proposed financing. (5 marks)
Criteria based marking guide for Question 4
Excellent Satisfactory Unsatisfactory
(a) • 3 or more concerns identified in regards to the specific terms of proposed term debt facility
• comprehensive and relevant explanation of why these specific terms may be of concern • 2 concerns identified in regards to the specific terms of proposed term debt facility
• basic explanation of why these specific terms may be of concern • no or inappropriate concerns identified
• concerns identified not specific in regards to the terms of the proposed term debt facility
• little or no explanation of why terms may be of concern
(Mark range: 4–5 marks) (Mark range: 2½–3.5 marks) (Mark range: 0–2 marks)
(b) • comprehensive explanation of why a separate construction debt facility is being used
• comprehensive understanding of how the construction debt facility is being used demonstrated • basic explanation of why a separate construction debt facility is being used
• basic understanding of how the construction debt facility is being used demonstrated • little or no explanation of why a separate construction debt facility is being used
• little or no understanding of how the construction debt facility is being used
(Mark range: 4–5 marks) (Mark range: 2½–3.5 marks) (Mark range: 0–2 marks)
(c) • comprehensive explanation of how the use of a shareholder loan affects the proposed financing • basic explanation of how the use of a shareholder loan affects the proposed financing • little, incorrect or no explanation of how the use of a shareholder loan affects the proposed financing
(Mark range: 4–5 marks) (Mark range: 2½–3.5 marks) (Mark range: 0–2 marks)
Answers to Question 4(a)–(c)
End of answers to Question 4(a)–(c)
END OF ASSIGNMENT