Project Finance Overview
We deliver Project Finance solutions on a world scale along with an inexorable commitment to make every deal more profitable for our clients. Global Trade Funding provides the international project financing our clients need along with deal structuring and due diligence advisory services that aggressively protect our client’s interests.
With more than two decades of senior underwriting experience at some of the world’s biggest banks, our directors give us unparalleled underwriting expertise coupled with the strength we derive having many of the world’s top lenders and financial institutions as strategic partners. From that foundation, we develop some of the most innovative project funding solutions in the world as we source unique project funding alternatives through capital markets and lenders worldwide. We also enhance your project with the capabilities of a global funding team with a history of successfully funding some of the most challenging and complex international financing projects in the world.
Our expertise in delivering successful project financing packages and our innate ability to match the right project with the right lenders, architects, engineers, consultants, builders, developers and all of the professionals your project will need is uncanny. Doing it seamlessly and at the right time gives us all the tools we need to arrange and deliver extraordinary financial solutions for challenging, difficult to place loans and projects.
Sustainability in international project financing means delivering at the most difficult of times. By exploiting our strengths and core expertise in project funding we are often successful at placing project development loans for clients whose financing has been declined by other financiers and lenders. If your project has been turned down, we can help. We’ll pre-underwrite your project financing to see if we can successfully fund your project where others have failed. Submit a Project Finance Request now and we’ll get your financing started today.
What Is Project Finance?
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 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 commitments from the project owners to contribute capital to the project to ensure the project is sufficiently capitalized and financially sound, and to exhibit the project sponsors’ commitment to the deal.
Project finance is often significantly more complex than traditional corporate finance or real estate lending. Historically 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 emerging and frontier markets. If the lenders or project sponsors determine that the risk exposure is too great during underwriting, the project is rendered unfinanceable.
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 by any participant. In this way, project risk is allocated amongst the deal participants who are best able to assume it.
The amounts involved in project development are often so vast that no single lender could or should provide the entirety of the project financing. Instead, the project financing is typically divided among a syndicate or 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 finance is the lending structure that has financed a great many of the massive infrastructure and sovereign projects in emerging market countries throughout the world.
Elements of Project Finance
Project financing is used for large project developments requiring a great deal of debt and equity, typically ranging from hundreds of millions to billions of dollars. Think infrastructure projects primarily in developing countries.
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 package.
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, fixed-price, turnkey contracts for construction which typically include severe penalties for delays put the construction risk on the contractor instead on the SPE, the project sponsors or the lenders. Risks inherent to typical project financing and mitigating factors are covered in more detail below.
Project Finance Document Structure
Projects are so complex, involve such vast amounts and so many participants, projects must also involve if they are to be successful, extensive, well-organized Project Finance Documents. We have prepared a Project Finance Document summary with a brief description of each of the typical project documents.
Project development transactions, especially international project developments typically involve numerous participants. In fact, it is customary for there to be ten or more participants who play major roles in the project.
Special Purpose Entities And Finite Life
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.
Non-Recourse or Limited Recourse Financing
With ownership in an SPE with no credit or assets, lenders are not distracted evaluating the borrower and all underwriting is focused on the project. Non-recourse financing reinforces this paradigm. The lender will more thoroughly examine the feasibility of the project. In extreme cases, if the lender is not satisfied that the project is sufficient to repay the loan, they may require some level of limited recourse from the sponsors or investors.
Cash Flow Applied to Debt Service
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.
Project finance is generally a more expensive financing structure than are 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 risks because so many projects are located in high-risk countries. Emerging market political risk insurance is commonly factored into overall costs.
Project Finance was first used in 1299 to finance development of English silver mines. England repaid the Italian merchant bank who funded the project with the output from the mines.
Project Finance Deal Participants
There are several parties in a project financing depending on the type and the scale of a project. The usual suspects include, but are not limited to the following:
- Financial Advisors
- Legal Advisors
- Debt Financiers
- Equity Investors
- Regulatory Agencies
- Multilateral Agencies
A financial model is constructed by the sponsor as a tool to conduct negotiations with the investors and prepare a project appraisal report. The model is usually a computer spreadsheet designed to process a comprehensive list of input assumptions and to provide outputs that reflect the anticipated real life interaction between data and calculated values for a particular project.
Properly designed, the financial model is capable of sensitivity analysis, i.e. calculating new outputs based on a range of data variations.
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Unparalleled underwriting expertise uniquely positions us to identify financing obstacles and improve deal structure to minimize risk and attract lenders. Then we present an optimized loan package to our worldwide network of lenders and investors resulting in project finance with the best terms and least risk in the industry.
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