Project financing is usually used to implement separate projects that are legally and economically independent. PF is carried out through specially created companies (SPV).
It is typically used to launch new projects rather than to finance existing businesses, except in cases of franchise sales or debt refinancing.
Project finance is characterized by a high level of debt compared to equity, which is called leverage or the ratio between the two. In such financing, 70 to 95% of the project's fixed asset costs can be covered by loans.
Project company investors typically provide no singapore business email list guarantees (non-recourse financing) or only partial guarantees (limited recourse financing), which limits their borrowing liability.
Lenders in project finance look at the future cash flows from the initiative that will be used to pay off debt and interest, rather than at the growth in the value of the development's assets or the improvement in its financial performance.
Project agreements become the main guarantee for lenders. In case of non-payment of debts, the value of the initiative company's tangible assets will probably be lower than the amount of debt when they are sold.
Lenders constantly monitor the work of the project organization to ensure compliance with the terms of the agreements and the preservation of their value, especially if the object does not meet the existing requirements.
The duration of the project depends on the duration of agreements and licenses, as well as the availability of natural resources.
Loans provided to the PF must be fully repaid by the completion of the project.
Project finance differs from corporate loans:
Credit funds in the Pension Fund do not depend on the collateral of assets on the organization’s balance sheet or the analysis of past cash flows and profits.
Unlike corporate loans, which assume a long-term commitment to the organization and the possibility of refinancing debts, project financing is associated with a limited lifespan of the initiative, and the loans must be fully repaid upon its completion.
Corporate loans provide access to funds from the borrower's overall operations, rather than to finance a specific project. This means that if a particular project fails, corporate lenders can rely on the organization's other resources to pay off their debts.
In the case of corporate loans, the company's buildings and equipment can be used as collateral. The lack of such methods in project financing is a minus for the lender.
Corporate loans typically allow a company's management to run the business as they see fit, as long as it does not cause significant financial problems.
Features of project financing
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In addition to the lack of collateral and other features of a new project organization that represent disadvantages from the point of view of a potential lender, project financing has a number of fundamental features that require special attention from bank analysts:
One such feature is the length of the projects. While mini-ideas in the residential construction sector can be implemented within two or three years, most projects in other areas usually require financing for more than five years. In some cases, the process can last more than ten years, although this situation is less common.
In project financing, the investment stage is always complex. Therefore, one cannot be sure that the process will be completed successfully.
Market research in such situations is more difficult than with smaller investments, because in the process of creating new products or services, it is difficult to find analogs or sales history. In some cases, the launch of a project can change the market so much that old information quickly becomes outdated.
The PF includes several main elements. One of them concerns the financing of the project organization itself and consists of the following parts:
equity capital provided by sponsors;
project finance loans provided by one or more groups of lenders.
Repayment of loans under the PF concerns the net operating cash flow of the project organization and has priority over other obligations, especially in relation to shareholders. The latter bear greater risk, since their income depends on the success of the project, while the profit of investors is usually higher than that of lenders.
Features of project financing
Source: shutterstock.com
There are other important elements related to the agreements that the project company enters into. Such documents include public-private partnership agreements, as well as contracts with subcontractors for the construction, operation, maintenance and ongoing repair of the facility.
These documents may include mechanisms for transferring risks from the project company to other participants, which plays an important role in ensuring the repayment of loans. Although such schemes and contract terms are not unique to the PF, their importance and interrelation are key in project financing under the PPP.
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