What is refinancing in project finance?
Refinancing refers to changing or replacing the existing lenders or terms on which debt obligations have been agreed between the Project Company and its lenders. In addition, a lack of available financing may mean a project becomes unable to continue operations.
What are the risk associated with project finance?
Typical project financing risks – Construction risk – Operational risk – Supply risk – Offtake risk – Repayment risk – Political risk – Currency risk – Authorisations risk – Dispute resolution risk Project finance is a form of secured lending characterised by intricate, but balanced, risk allocation arrangements.
What is meant by refinancing risk?
Refinancing risk refers to the possibility that an individual or company would not be able to replace a debt obligation with new debt at a critical time for the borrower. Your level of refinancing risk is strongly tied to your credit rating.
What exactly does refinancing mean?
Refinancing your mortgage basically means that you are trading in your old mortgage for a new one, and possibly a new balance [1]. When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one; this is the reason for the term refinancing.
How is refinancing risk part of interest rate risk?
How is refinancing risk part of interest rate risk? Refinancing risk is the risk that the cost of rolling over or reborrowing funds will rise above the returns being earned on asset investments. This risk occurs when an FI is holding assets with maturities greater than the maturities of its liabilities.
How do you manage risk in project finance?
As mentioned in the previous chapter, risk management techniques for project finance transactions consist of a combination of five different but interrelated steps, i.e., risk identification, risk assessment, risk reduction, risk spreading, and hedging and insurance.
What are high level risks in project management?
Some commonly experienced project risks include:
- Technology risk. The technological aspect of running a project is a complex deliverable because there is a high turnover of new and advanced technologies.
- Communication risk.
- Scope creep risk.
- Cost risk.
- Operational risk.
- Skills resource risk.
- Performance risk.
- Market risk.
How do you hedge reinvestment risk?
Investors can reduce reinvestment risk by holding bonds of different durations and by hedging their investments with interest rate derivatives. Having a fund manager can help reduce reinvestment risk; therefore, some investors consider allocating money into actively managed bond funds.
Is there any risk associated with refinancing debt?
Nevertheless, it is observed that, increasingly, refinancing risk is creeping into the financing of single revenue-generating assets, often with debt structures more commonly associated with corporate and structured finance than traditional or classic project finance.
How is refinancing risk managed in a bank?
Refinancing risk is a common phenomenon in banks and financial institutions. Banks regularly take this risk to fund long-term assets such as infrastructure projects, home loans, etc. This risk is managed by specialized functions known as the asset-liability management (ALM) department in every bank and Financial Institution.
When does the refinancing risk get aggravated?
The refinancing risk gets aggravated when there is slow down and liquidity crunch in the economy as keeping cash is preferred, which results in less credit creation and the inability of individuals and institutions to meet their matured liabilities, thereby aggravating the problem further.
Is it a good idea to refinance your home loan?
In general, refinancing makes sense if you want to lessen your monthly cash flow or pay off your home loan sooner. However, refinancing, itself can be costly and if you have not done your due diligence regarding the fees and closing costs of refinancing, you could get into even deeper debt.