Signs of Financial Distress in Projects Funded by Project Finance

Abstract

The need to implore project finance for funding projects cannot be overemphasized. Project financing are however susceptible to risk. In the last few decades, a number of projects and companies have plunged into financial distress. The impact of financial distress on economies of nations is huge. Financial distress of companies and projects is of serious concern and need to be investigated in order to find a remedy for the canker. This paper moves beyond traditional ratio analysis to find out the possibility of financial distress of companies and projects using a Prediction model. The Modified Altman’s Z-score Model is applied to the financial statements of the defunct Enron Company to see if it was possible to detect its collapse before it eventually did. The Modified Altman’s Z-score Model is a predictor of bankruptcy. It was found that the use of the Modified Altman Model was possible to notice early signs of financial distress of the Enron Company in particular and generally all businesses. It is recommended that projects and companies should make it a habit to apply Prediction models to test their financial soundness regularly to guide against financial distress.

Keywords: Project finance, financial distress, Prediction models, The Modified Altman model