Project Finance

Project Finance or Project Financing is defined as a long term capitalizing process of industrial endeavors and kernels which is based on limited auxiliary of monetary structure where the debt as well as the equity of the project is used to finance it and the debt is repaid from the profit instigated by the venture. It is a type of non-expedient loan which is secured by the assets acquired by the project and is returned totally by the profit made by the project. In the world today the Industrial sector is rapidly growing. This has made the term Project Finance important in the financial market over past few decades. It is an old method of financing heavy risky and developing ventures.

It’s the most common question in the industry yet it’s difficult to answer because there is no consensus definition of project finance. Worse still, many of the most often used definitions of project financing aren’t in agreement. Despite the lack of a consensus definition of project finance, there is almost universal agreement on the features of project finance that are common in every project financing.

Because there are numerous features of project finance present in all project financings, we look to those features of project finance to provide context to our clients and visitors. Identifying the features of project finance which are common to all project financings is important to understanding project financing. If the financing you seek for your project includes all of the features highlighted below it is a virtual certainty that project finance is the course you should pursue to finance your deal.

As many existing companies look to expand their business and their manufacturing facilities, the basic choices in financial options are “off-balance sheet” or “limited recourse”.

Project finance Our Team is very experienced in counseling clients in evaluating structures to accomplish the desired goal. This experience in structured finance for industrial companies is an integral part of our finance practice. The greatest hurdle in implementing an idea as a project is money and project finance can be proved as a solution to this problem. The procedure of financing can broadly be classified into two types: equity capital and borrowed capital or debt capital. A project manager’s duty is to make use of these two options discreetly as per the project’s nature. Other options for funding a project include share capital, debenture capital, term loans, seed capital, government subsidies etc.

Recent studies show that India tops the list of countries ahead of US and Australia in terms of worldwide project finance market. The finance giants are eager to provide the project finance in India. Like the World Bank is yearning to fund the solar energy projects in India. As a developing nation India requires humongous investments to better its kernel and this has given birth to the sudden interest in financing projects in India.

PROJECT FINANCE DOCUMENTS :

One of the most important features of project finance is the extent of project documents. Project financings are so complex, involve such vast amounts and so many participants, projects necessarily must also involve extensive, complex project finance documents if they are to be successful. Well-organized, well-written project documents are an absolute requirement of project financings. Because project finance documents play such an

Important role in project finance we have prepared a project finance document summery. with a brief description of each of the typical project documents.

Project Financing Cash Flow Waterfall :

Again, due to the SPE and non-recourse financing, loan documents will typically contain a contractual obligation to apply excess cash flow from the project to debt service. Thus, any excess cash flow applied in this manner will accelerate loan amortization and reduce the lender’s risk exposure.

Cost of Project Financings :

One of the most common features of project finance is it is generally a more expensive financing structure than is typical corporate finance options. Further, project finance involves the use of highly-specialized financial structures which also drives costs higher and liquidity lower. Margins for project financings usually include premiums for emerging market risk and political risk because so many projects are located in high-risk countries. Emerging market political risk insurance is commonly factored into overall costs.

Project Financings Are Off-Balance Sheet :

Project finance is off-balance-sheet financing. In project finance transactions, the project company that owns the project is a stand-alone company known as a special purpose entity. Because there are numerous participants and stakeholders in the project and ownership of the projected is a Special Purpose Entity, the ownership interest of the project sponsor or other project participant is a sufficiently minority subsidiary interest. As such the balance sheet of the project company is not consolidated onto the balance sheets of the project sponsors or shareholders.

The off-balance-sheet element of project finance is attractive to project sponsors because project loans do not negatively impact the sponsor’s balance sheet, nor does it impact their available borrowing capacity. Government entities also find the off-balance-sheet feature of project finance attractive because project debt and liabilities don’t impact their balance-sheets, relieving pressure on an increasingly stressed fiscal space.

Project Financings Are Non-Recourse :

Project finance is either non-recourse or very limited recourse as to individual shareholders, including the project sponsors. Non-recourse financing means the borrowers have no personal liability in the event of monetary default. Project companies are generally limited liability special purpose entities, so any recourse the lender may have will be limited to the project assets if the project defaults on the debt.

The project is owned by a special purpose entity which is formed for the express purpose of owning the project. The project company has no credit or assets so lenders don’t evaluate the project company when underwriting the project. Because project loans are non-recourse and the borrowers have no assets to satisfy deficiencies in the event of project default, underwriting is focused entirely on the viability of the project.

Project Financings Have Numerous Participants :

Another feature of project financings is that they always involve many, many participants. Beginning with the project sponsors, the vast amounts involved in project finance usually require equity investors, project finance providers like Global Trade Funding, project lenders which frequently become a consortium of lenders, to share the risk, and so on. Review our Project Finance Learning Center for extended information about the project participants and stakeholders.

Project Financings Are Capital-Intensive :

A less visible element of project finance is that it involves huge amounts of financing because it is used to finance major international development and infrastructure projects. According to Project Finance International, the average project financing in 2017 was almost $750 million. While Global Trade Funding provides project financing of at least $20 million, project financings typically involve amounts ranging $50 million to more than one billion dollars. Think infrastructure projects primarily in developing countries.

Project Financings Allocate Risk :

International project financing transactions tend to be riskier than ordinary corporate finance deals. Because of the risk exposure, allocation of the risk in the deal is often critical for approval of the project finance loan.

Risk allocation, which is accomplished in the project documents attempts to match risks and corresponding returns to the deal participants most capable of successfully managing them. For example, EPC Contracts which are fixed-price, turnkey contracts for construction that include severe penalties for delays put the construction risk on the contractor instead on the SPE, the project sponsors or the lenders. Risks inherent in typical project financings and mitigating factors are covered in more detail below.

Project Financings Special Purpose Entities :

Project ownership is ordinarily held in a single-asset, Special Purpose Entity (SPE) with a limited life (sometimes referred to as Special Purpose Vehicle or Special Purpose Company) formed for the express purpose of owning a project pursuant to a Project Finance transaction by the project sponsors. They own only the underlying deal itself. In many cases, the clearly defined conclusion of the project is the transfer of the SPE.