Let’s just assume that you are the CEO of a company. Your company has been operating for quite a couple of years, does have intellectual property and other assets, and you’re excited about a new project.
Given the absence of a consensus on the concept of project finance, there is universal agreement on the qualities of project finance which are similar to all project financing.
As there are different attributes of project finance reflected throughout all project financing, we take a glance at all of those characteristics of project finance that can provide context to our clients.
Recognizing the qualities of project financing that are similar to all project financing is critical for understanding project financing.
Unless the support you are seeking for your project incorporates all of the features outlined below, it is a virtual guarantee that project financing is the path you will take to finance your agreement.
It is advised to hire a project finance consultant to get the funding at the lowest rates.
Features of Project Finance
Project finance is just the funding of major projects such as public works and publicly owned projects. Nevertheless, there is no common concept of project finance.
Given the annual origination of more than $230 billion in project finance loans, the industry does not really rely on a consensus mostly on the concept of project finance.
Amid almost complete disagreement mostly on the concept of project finance, there is almost global agreement mostly on characteristics of project finance that are similar to all project financing and thus are described below.
Another very noticeable feature of project financing is that it is a non-recursive obligation to individual shareholders, plus project sponsors.
Non-recourse funding ensures that the creditor and the borrower’s creditors have really no personal obligation in the case of monetary default.
Project companies are typically limited liability special purpose corporations, and any leverage that the lender might have would be restricted solely or exclusively to project assets (such as completion and performance guarantees and bonds) if a project company fails to pay the debt.
The special-purpose corporation project company shall be established for the explicit intent of possessing the project.
The project company seems to have no credit or assets so that the project lenders do not analyze the project company when they underwrite the project.
Although these funds are non-recourse and the borrowers do not have assets to meet the shortfalls as in the incident of the project default is solely reliant on the effectiveness of the project.
In certain situations, if the project lender isn’t really pleased with the project’s potential to redeem the debt, the lender may need minimal recourse from sponsors or creditors.
Off-Balance Sheet Financing
A very noticeable component of it is that it is off-balance-sheet financing. In project financing transactions, the owner, referred to as the project company, is a lone company that is known as a special purpose entity.
As there are multiple members and project stakeholders and the possession of the proposed company is a special purpose entity, the ownership stake of the sponsor or from any one project team member is a relative minority of subsidiary interests.
Even so, the balance sheet of the firm is still not included on the balance sheets of both the project promoters or shareholders.
The off-balance-sheet aspect of project finance is appealing to both project sponsors and participants, as the loans do not burden their balance sheets with loans, nor do they affect their accessible lending potentials.
Governmental agencies also consider an off-balance-sheet attribute of project finance alluring, as debt and liabilities may not affect their balance-sheets, reducing pressure on an extremely stressed fiscal area.
A much less noticeable aspect of project financing would be that it requires large sums of money, as it is used to fund big global development and infrastructure ventures.
Thus according to Project Finance International, the typical project financing amounted to about $750 million in 2017.
Although Global Trade financial support offers at least $20 million in project funding, project funding usually varies from $50 million to more than $1 billion. Speak about infrastructure programs mainly in developed countries.
Numerous Project Participants
One such characteristic of project funding is that it often requires a large number of project participants. The significant quantities usually involved in project financing frequently find it essential for sponsors to add investors to a list of project stakeholders.
Mostly in the case of big ventures, project finance providers such as Global Trade Funding often become the leading provider of funding, distribution of job obligations, benefit, and, most importantly, the risk for many financiers.
Likewise, project financing for large projects is sometimes too complex for one lender to provide. If the cost of the project loan is too elevated a proportion of the lender’s capital, the lender often takes on the role of a lead lender in a consortium of lenders and lends a portion of the loan to other organizations.
Financial institutions rarely like to be in a situation in which the weakness of one project or creditor to be high enough to cause their own loss.
In addition to numerous financiers, lenders, and investors, project funding requires a long list of skilled stakeholders, including consultants, vendors, designers, and managers, and it is not unusual that there would be 20 or more primary project participants.
Project Finance Documents
Amongst the most essential part of the project, finance seems to be the scope of the project documents. Project financing is too complicated, requires such large sums, and so many participants must inevitably have comprehensive, detailed project finance documentation if they are to prove successful.
Well-organized, excellently-written project plans have become an essential prerequisite for project financing. Because project finance documents play a critical role in project finance.
Global project funding transactions tend to be more volatile than regular corporate finance transactions. Due to the risk exposure, the distribution of risk in the arrangement is always crucial to the acceptance of the project finance loan.
Risk distribution, which is carried out in project papers, aims to assign risks and related returns to deal with members that are most capable of managing them effectively.
For instance, EPC Contracts which are fixed-price, turn-key construction contracts that contain significant penalties for delays place the construction burden on the contractor rather than the SPE, the project sponsors, or even the lenders.
Special Purpose Entities And Finite Life
Project ownership is usually held in a single asset, SPE (Special Purpose Entity) with a short lifespan (occasionally referred to it as a Special Purpose Vehicle or Special Purpose Company) established for the explicit intent of controlling a program as part of a Project Finance transaction by project sponsors.
They own just the basic deal under their own. For certain instances, the simple outcome of the analysis is the transfer of the SPE.
Cost of Financing
The most popular aspect of project financing is the expense that is typically more costly than traditional corporate financing options.
In addition, project funding also requires the use of highly complex financial systems that drive higher costs and lower liquidity.
Due to the complexities involved with the procurement of project financing loans, the difficulty of the developing and structuring of complicated financing systems, the extensive effort that goes into subscribing project financing put an end to the tremendous amount of design and drafting of project papers, project financing requires more time and more research than other forms of financing on an order of magnitude. Project Finance, therefore, costs considerably more than other types of financing.
The price of project financing could still be greater based on the current economy, as prices are pushed higher by emerging economy risk premiums and political risks. Emerging market insurance for political risks is generally included in the total rate.