Diff between Project Finance, Corporate Finance, & Structured Finance

Project finance Project Finance:
Defined by the International Project Finance Association (IPFA) as the following:

“The financing of long-term infrastructure, industrial projects and public services, based upon a non-recourse (Project Finance that is secured by some sort of collateral, usually property, plant, equipment etc is known as non- recourse financing; The issuer can seize the collateral if the borrower defaults) or limited recourse financial structure, where project debt and equity used to finance the project are paid back from the cashflow generated by the project”.

Explanation:
The following is a hypothetical description of a basic project finance scheme.

Acme Coal Co. imports coal. Energen Inc. supplies energy to consumers. The two companies agree to build a power plant to accomplish their respective goals. Typically, the first step would be to sign a memorandum of understanding to set out the intentions of the two parties. This would be followed by an agreement to form a joint venture.

Acme Coal and Energen form a SPC called Power Holdings Inc. and divide the shares between them according to their contributions. Acme Coal, being more established, contributes more capital and takes 70% of the shares. Energen is a smaller company and takes the remaining 30%. The new company has no assets.

Power Holdings then signs a construction contract with Acme Construction to build a power plant. Acme Construction is an affiliate of Acme Coal and the only company with the know-how to construct a power plant in accordance with Acme's delivery specification.

A power plant can cost hundreds of millions of dollars. To pay Acme Construction, Power Holdings receives financing from a development bank and a commercial bank. These banks provide a guarantee to Acme Construction's financier that the company can pay for the completion of construction. Payment for construction is generally paid as such: 10% up front, 10% midway through construction, 10% shortly before completion, and 70% upon transfer of title to Power Holdings, which becomes the owner of the power plant.

Acme Coal and Energen form Power Manage Inc., another SPC, to manage the facility. The ultimate purpose of the two SPCs (Power Holding and Power Manage) is primarily to protect Acme Coal and Energen. If a disaster happens at the plant, prospective plaintiffs cannot sue Acme Coal or Energen and target their assets because neither company owns or operates the plant.

A Sale and Purchase Agreement (SPA) between Power Manage and Acme Coal supplies raw materials to the power plant. Electricity is then delivered to Energen using a wholesale delivery contract. The cashflow of both Acme Coal and Energen from this transaction will be used to repay the financiers.

This is a simple explanation which does not cover the mining, shipping, and delivery contracts involved in importing the coal (which in itself could be more complex than this scheme), nor the contracts for delivering the power to consumers. However, this serves to explain how and why companies create SPCs and obtain financing for major projects.

Related Terms

Non-recourse financing: financing secured only by the project itself.

Limited recourse financing: financing secured primarily by the project and by additional reassurances from sponsors.

Off-Balance Sheet Financing: when a minority owner discloses its participation in the project as an investment and excludes the debt from its financial statements by disclosing the debt as a footnote related to the investment.

Sectors: Project finance typically covers the following sectors: Power; Mining; Oil & Gas; Transportation; Water/Utilities; Telecommunication; and Petrochemicals.


2. Structured Finance:

A service offered by many large financial institutions for companies with very unique financing needs. These financing needs usually don't match conventional financial products such as a loan. Structured finance generally involves highly complex financial transactions.

Basically structured finance describes any "non-standard" way of raising money. These tailor-made securities go beyond "standard" securities like conventional loans, debentures, debt, and equity. The reason to structure a more advanced security may be that conventional securities may be unattractive, unavailable or too expensive.
Structured finance often refers to using loopholes in a country's tax law to obtain some unintended tax benefit which is used to provide a cash flow benefit to a borrower. Generally these structures result in the following:

1. create tax deductions where there has been no economic expense; or
2. convert taxable income into tax exempt income; or
3. convert non-tax deductible expenses into tax deductible expenses.

The structured finance industry has flourished as tax laws have become more and more complex, and as cash flow modeling techniques have become more sophisticated. The globalization of finance has also pushed growth in this area.

Recently, governments have begun efforts to reduce the loss of their tax revenues caused by use of these unintended tax consequences in structured financing transactions. Countries such as the United States of America, the United Kingdom and South Africa, amongst others, have introduced a variety of measures to combat aggressive tax avoidance schemes. These measures include compulsory and timely disclosure of schemes to the tax authorities, as well as statements by politicians making it clear that the use of "unacceptable" (albeit legal) tax avoidance schemes will be attacked.

Some Examples of Structured finance:
oAsset-Backed Securities (ABS)
oCollateralized Debt Obligation (CDO)
oConvertible bonds
oSecuritization
oAssurance contracts
oSpecial purpose entity (SPE)

3. Corporate Finance
Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analyses used to make these decisions.
The discipline as a whole may be divided among long-term and short-term decisions and techniques with the primary goal being the enhancing of corporate value by ensuring that return on capital exceeds cost of capital, without taking excessive financial risks. Capital investment decisions comprise the long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. Short-term corporate finance decisions are called working capital management and deal with balance of current assets and current liabilities by managing cash, inventories, and short-term borrowing and lending (e.g., the credit terms extended to customers).
Corporate finance is closely related to managerial finance, which is slightly broader in scope, describing the financial techniques available to all forms of business enterprise, corporate or not.