Development Overview
INTERNATIONAL PROJECT FUNDING
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PROJECT FINANCING OVERVIEW
We deliver project finance solutions along with an inexorable commitment to make every client deal successful. Specialty Mortgage Capital provides the international project financing along with deal structuring advisory services that mitigate risk and aggressively protects your interests.
We strive for the most innovative project funding solutions in the world, and source unique project funding alternatives through capital markets and lenders worldwide. We also enhance your project with the capabilities of a global funding team that has a history of successfully funding large development projects.
With our expertise we deliver successful project financing packages and match the right project with the right lenders so your project gets funded. Doing it seamlessly allows us to arrange and deliver extraordinary financial solutions for challenging loans and projects.
By exploiting our strengths and core expertise in project finance we are often successful at placing project development loans for clients whose financing has been impeded by other financiers and lenders. We’ll pre-underwrite your project financing request to see if we can successfully fund your project. Submit a Project Finance Request now and we’ll get your financing started today.
PROJECT FINANCE DEAL STRUCTURE
The typical project financing structure, which has been simplified for these purposes, for a build, operate and transfer (BOT) project is shown. The key elements of the structure are:
- Special purpose vehicle (SPV) project company with no previous business or record;
- Sole activity of project company is to carry out the project – it then subcontracts most aspects through construction contract and operations contract;
- For new build projects, there is no revenue stream during the construction phase and so debt service will only be possible once the project is online during the operations phase, thus there are significant risks during the construction phase;
- Sole revenue stream likely to be under an off-take or power purchase agreement;
- The project finance loans are non-recourse as to the borrowers, including the sponsors of the project and shareholders of the project company. There are extensive project financing documents that required no personal liability under the project loans. Thus, the project sponsor and project shareholders are liable only up to the extent of their shareholdings;
- Project Finance Structure means the project remains off-balance-sheet for the sponsors and for the host government.
PROJECT FINANCE DETAILS
Project Finance provides long-term, limited recourse or non-recourse loans used to finance large commercial, industrial, infrastructure and sovereign projects in emerging market nations worldwide.
Unique to project financing is the debt and repayment structure are based on the projected cash flow of the project rather than the balance sheets of the project sponsor. Usually, a project finance structure involves a number of equity participants, who can be project sponsors or equity investors, and a consortium of lenders that provide loans to the project.
Project finance loans are almost always extended on a non-recourse or limited recourse basis and are secured by the project assets and operations. Repayment of the loans occurs entirely from project cash flow, not from the assets or credit of the borrower.
Underwriting for project development loans focuses on what is usually a business plan that includes extensive financial modeling and sensitivity analysis. The financing is typically secured by all of the project assets, including the revenue-generating components of the project. Lenders are granted a lien on all of the project assets and are further granted the right to assume managerial and operational control of a project, along with the mechanism to do so if the project doesn’t comply with the loan terms.
The borrower is typically a Special Purpose Entity or SPE which is created in the project finance documents specifically to own the project. The SPE ownership structure coupled with non-recourse debt effectively shields the assets of both the project sponsor and equity investors from collection efforts or deficiency actions if the project fails.
With collection actions barred if the deal fails, project lenders often require a commitment from the project owners to contribute capital to the project to ensure the project is sufficiently capitalized and financially sound, and also to demonstrate the project sponsors’ commitment to the deal.
Project finance is significantly more complex than traditional corporate finance or real estate lending. Historically international project finance has been used for mining, telecom, transportation and communication, water and electric utility distribution, and major public infrastructure projects.
Allocation of the risk stack among project participants is a key component of project finance. Project developments are often subject to technical, environmental, economic and political risks, particularly in developing countries and frontier and emerging markets. If the lenders or project sponsors determine that the risk exposure is too great during underwriting, the project is rendered not financeable.
Long-term contracts for construction, supply, off-take, operations and concessions, along with contracts establishing joint-ownership of the project are structured in extensive project documentation to best align the interests and incentives of all the project participants. They are also designed to dissuade bad behavior on the part of the deal participants. In this way, project risk is allocated amongst the deal participants who are best able to manage the risk.
The amounts involved in project development financing are often so vast that no single lender could or should provide the entirety of the project financing. Instead, the project financing is often syndicated to a consortium of lenders to distribute the risk.
Project financing was used as far back as the ancient Greeks and Romans to finance maritime voyages. It was project finance that funded construction of the Panama Canal and the North Sea oil wells.
Today, most project financing is deployed in developing countries around the world where the need for project financing remains high and will for the foreseeable future. As more countries move from frontier to emerging economies demand for public utilities and infrastructure will continue to increase.
PROJECT FINANCIAL MODELING
Project sponsors who are seeking equity investors, project lenders and other stakeholders have to appeal to these potential project participants by presenting them with a proposal that is sufficiently compelling to get them to risk vast sums of money investing in their project. In other words, project sponsors must demonstrate that an investment in their project will provide a return on their invested capital that is great enough to put their money at risk.
Most proposed investments involve the acquisition of an asset that is already in operation and already has demonstrable revenue, such as a company, an apartment community or an industrial facility. Project financings don’t have operating assets with demonstrable because they involve the development of assets. With unproven revenue, expenses and cash flow, project sponsors must base their proposals to potential equity investors and lenders on projections. They do that with financial models and well-written, compelling business plans.
Project financial models are sophisticated computer spreadsheets that employ a lengthy list of business assumptions and variables to develop financial forecasts of capital costs, revenues, expenses, cash flow and future value of the assets. Financial models are used by project sponsors as a tool to negotiate with investors and lenders, and as support for appraisal reports and financial feasibility studies.
Because financial models form virtually the entire basis for investing in or lending on the proposed project, they must be based on reasonable, believable and transparent assumptions and variables that reflect the anticipated real-life interaction between data and calculated values. The financial model must also be capable of sensitivity analysis that calculates projections based on a range of data variations. They must also demonstrate future profits and returns on investment which are sufficiently compelling to convince investors and lenders to invest in your project.