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10/4/2017

A Comparison
Between
Corporate and
Project Finance

Wanda Monrose
ID: 416000344

1
INTRODUCTION
This paper seeks to present a comparison between corporate and project finance by analysing two
statements relating to the two forms of financing
...
This will be
subsequently followed by examining the similarities between the two and then the variations
...
d
...
They are;
1
...
Generally, these investments are not very capital intensive
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Capital structure – this deals with determining the financing mix, i
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how the investments should
be financed
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Working capital management – which concerns the management of cash flows as they arise in
the firm’s day-to-day operations (Titman, Keown, & Martin, 2014)
...

Figure 1 in the Appendix displays the general structure of corporate finance
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Credit appraisals and debt terms are
typically based on project cash flow forecasts as opposed to the creditworthiness of the sponsors and the
actual value of the project assets” (Fight, 2006)
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The project must be finite,
capital intensive and debt repayment must be serviced by projected future cash flows of the project
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It must also be noted that one critical theme which permeates through these definitions and other like
ones, is the concept of the investment project debt being serviced solely through the cash flows generated
by the project, which suggests that the assets of the sponsor company cannot be pursued by the lender
in case of default
...

Figure 2 in the Appendix displays the general structure of project finance and highlights the key
components
...
Firstly, both forms of financing can enhance shareholder value
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Wanda Monrose
ID: 416000344

3
Both forms of financing employ debt and equity as a way of sourcing funds
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According to Pinto and Alves (2016), in corporate finance there is an allowance for the choice to be made
to create a special purpose vehicle to permit borrowing off-balance sheet
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Invariably,
the use of such an entity lowers financial risk to the sponsor through segregation
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Consequently, both require budgeting decisions to be made
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In both cases,
the restructuring necessitates effective creditor coordination to facilitate the process and to allow for
acceptance among the creditor body at large (Kargman, 2003)
...
Project Finance caters to
more capital-intensive projects such as power plants, toll roads and pipelines (Davis & Fabozzi, 2008) as
opposed to corporate finance
...
This thereby allows for a consortium of investors
and other participants to undertake the project which would otherwise be too large for individual
investors to guarantee (Comer, 1996)
...
d
...

Shareholders are free to provide equity for the life of the corporation
...
Consequently, agency costs in project finance are reduced because lenders
make debt repayment provisions in the contract to ensure that managers use the cash flows allocated for
that specific purpose and not for their own gain as is often the case in corporate finance
...

Moreover, project finance facilitates closer monitoring of management compared to that of corporate
finance where direct monitoring of management by investors is limited as greater control is entrusted to
the former party (Finnerty, 2013)
...
In contrast to corporate finance where debt repayment is asset based, this
repayment in project finance is solely dependent on the future cash flows of the project
...

Earlier, it was mentioned that both corporate and project finance share the common use of a special
purpose vehicle (SPV) to essentially isolate risk
...
In some instances, especially with corporate finance,
the SPV may take a slightly different form with the non-existence of independent management or
employees (Gorton, 2015)
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It is responsible for the design, build and execution of the project
...
Evidently, the organizational structure of project finance separates project related assets and
cash from the sponsor’s other activities, whereas in corporate finance these are commingled
...
This lends to an
increased debt capacity in project finance because the credit rating (based on the project) is better than
corporate finance (rating based on sponsor’s balance sheet)
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In general, therefore, higher risks are associated with corporate
finance whereas lower risks are associated with project finance (Vaidya, 2017)
...
d
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CONCLUSION
To conclude, both corporate and project finance are forms of financing that can be used for various
investments
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However, their differences lie
primarily in the amount of capital required, the organizational structure, the debt repayment structure of
the investment/s and subsequently the amount of risk involved
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Wanda Monrose
ID: 416000344

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REFERENCES

Comer, B
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Project Finance Teaching Note
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wharton
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edu/~bodnarg/ml/projfinance
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A
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J
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Project Financing
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Erasmus, E
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Introduction to Corporate Finance -Guest Lecture MBA Class UA
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slideshare
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erasmus/introduction-to-corporatefinance-guest-lecture-mba-class-ua
Fight, A
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Introduction to Project Finance
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Finnerty, J
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(2013)
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Hoboken: John Wiley & Sons,
Inc
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, & Sabal, J
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An Introduction to Project Finance in Emerging Markets
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esade
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pdf
Gorton, G
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(2015)
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New York: Oxford University Press
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(n
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Corporate Finance
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investopedia
...
asp
Kargman, S
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(2003)
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The Journal of Structured and Project Finance , 35-48
...
A
...
d
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Retrieved from Academia Web Site:
https://www
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edu/15087234/CORPORATE_FINANCE_VERSUS_PROJECT_FINANCE
Pinto, J
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, & Alves, P
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(2016, September 19)
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Retrieved from
http://www
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org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2017Athens/papers/EFMA2017_0082_fullpaper
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(2016, September 6)
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worldbank
...
(2014)
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Essex: Pearson Education
Limited
...
(2017)
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Retrieved September 26, 2017, from
http://www
...
com/corporate-finance-vs-project-finance/

Wanda Monrose
ID: 416000344

7

APPENDIX

Figure 1- Structure of Corporate Finance (Erasmus, 2013)

Figure 2 - Structure of Project Finance (Project Finance- Key Concepts, 2016)

Wanda Monrose
ID: 416000344



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