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Project Finance Learning Center2020-12-09T22:19:22-05:00

Project Finance Learning Center

Quick Reference Overview of Project Finance Knowledge

Project Finance Learning Center is intended to be a knowledge resource to learn summary level project finance material either before applying for project financing or as you are proceeding through the financing process.

Project Finance Learning Center

Project finance was first used in 1299 when an Italian merchant bank provided the project financing to finance the development of English silver mines. England repaid the Italian merchant bank who funded the project with the output from the mines. Project financing has been used to finance thousands of projects since those silver mines, including such notable projects as the Panama Canal and North Sea oil platforms. Our Project Finance Learning Center includes information we hope will improve understanding of this type of finance.

Definition of Project Finance

Project finance is not as well understood than it should be due largely to the fact that there is no consensus definition of project finance. Perceptions of what constitutes project financing vary depending on the definition of project finance you first learned. We list three of the most widely accepted definitions below.

A financing of a particular economic unit in which a lender is satisfied to look initially to the cash flow and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.1

The raising of funds to finance an economically separable capital investment project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity invested in the project.2

The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.3

References

  1. Finnerty, J.D., 1996, Project Financing:  Asset-Based Financial Engineering. New York, NY:  John Wiley & Sons.
  2. Nevitt, P.K., and F.J. Fabozzi, 2000, Project Financing, 7th edition, Euromoney Books (London, U.K.).
  3. Standard & Poor’s Corporation, 2003, Project Finance Summary Debt Rating Criteria, by P. Rigby and J. Penrose.
  4. Project & Infrastructure Finance Review, 2003-2004, Criteria and Commentary, October.

Project Finance Questions & Answers

Who pays due diligence costs in a project financing?2024-04-15T04:15:05-04:00

We separate the due diligence functions in project finance into two distinct packages. The preliminary due diligence investigation, which is the more affordable of the two segments, is performed more or less coincidentally with the site visit to see your project. The final, comprehensive due diligence package, which is the more expensive of the two, is performed only after your project has received preliminary approval.

The borrower pays for both investigations. The borrower also pays for the cost of the site visit for two of our senior managing partners, and one senior staff person, along with all related expenses.

Review Project Finance Due Diligence for additional information.

What is the due diligence process in a project financing?2022-02-07T11:49:54-05:00

Before we submit a project finance loan request or documents to our financial partners, we perform a preliminary due diligence investigation. While not the final, comprehensive due diligence that will be required if the deal continues forward, the preliminary due diligence investigation is intended to uncover any sponsor or project deficiencies that would hinder the closing of the project financing.

We will verify the Sponsor’s reputation, financial strength, and relevant experience. We will verify the quality and sufficiency of the project documents (at least those that have been prepared to date), and we will analyze the project and property in tandem with our site visit. Our Preliminary Due Diligence Report will be prepared after the site visit and provided to the lenders.

Review Project Finance Due Diligence for additional information.

Is the borrower required to have equity in the deal?2019-06-30T15:10:56-04:00

Yes. We require actual cash equity in the deal. All project finance lenders, project finance arrangers and project finance providers require the borrower to have equity in the deal. We have never funded a project financing with less than 10% equity, and then only once in the last decade. The average project financing last year closed with 63% debt and 37% sponsor equity.

Project finance is not speculation. It was developed more than 700 years ago as a method of financing that is specifically intended to mitigate or eliminate risk. In fact, almost every element and procedure in project finance are for risk mitigation. For every project finance transaction closed there are more than 20 applications because project finance lenders are extremely careful about taking risk. Deals with no equity don’t get funded and deals with very little equity stand very little chance. For additional information see

What does due diligence entail?2022-02-07T01:24:36-05:00

We perform enhanced due diligence on all project stakeholders with an emphasis on project sponsors. The due diligence investigations are mandatory and project finance underwriting cannot be completed until all of the due diligence has been implemented. We have a form for project sponsors which is furnished at the start of underwriting. Due diligence investigations are performed by a third party service with whom we have an agreement for discounted investigative fees and you are only responsible for the actual fee.
When does due diligence occur?2022-02-07T11:32:36-05:00

Before we submit a project finance loan request or document package to one of our financial partners, we perform a preliminary due diligence investigation. It’s not the comprehensive due diligence that will be required if the deal continues forward, the preliminary due diligence investigation is intended to uncover any sponsor or project deficiencies that would hinder the closing of the project financing.

We will verify the sponsor’s reputation, financial strength, and relevant experience. We will verify the quality and sufficiency of the project documents (at least those that have been prepared to date), and we will analyze the project and property at about the same time as our site visit. Our Preliminary Due Diligence Report will be completed after the site visit and provided to the lenders with the loan application and project finance documents.

Review Project Finance Due Diligence for additional information.

Will you invest financially in my project?2019-06-27T10:24:39-04:00

If the lenders do not appoint us as loan supervisors we may join the lending syndicate.

Project Finance Lexicon

Accounts Receivable

Accounts Receivable is money owed to a company by a customer for products and /or services sold. Accounts receivable is considered a current asset on a balance sheet once an invoice has been sent to the customer.

Accounts Receivable Factoring

Accounts Receivable Factoring is a method of Trade Financing where a company sells their accounts receivable in exchange for working capital. The purchaser of the receivables relies on the creditworthiness of the customers who owe the invoices, not the subject company.

Service For details go to Accounts Receivable Factoring »

Advance Against Documents

Advances Against Documents are loans made solely based on the security of the documents covering the shipment.

Asset Based Lending

Asset Based Lending is a method of Trade Financing that allows a business to leverage company assets as collateral for a loan. Asset-based loans are an alternative to more traditional lending which is generally characterized as a higher risk which requires higher interest rates.

Cash Against Documents

Cash Against Documents is the payment for goods in which a commission house or other intermediary transfers title documents to the buyer upon payment in cash.

Cash in Advance

Payment for goods in which the price is paid in full before shipment is made. This method is usually used only for small purchases or when the goods are built to order.

Cash with Order

Cash with Order is the payment for goods whereby the buyer pays when ordering and in which the transaction is binding on both parties.

Commercial Finance

Commercial Finance is defined as the offering of loans to businesses by a bank or other lender. Commercial loans are either secured by business assets, accounts receivable, etc., or unsecured, in which case the lender relies on the borrower’s cash flow to repay the loan.

Confirmed Letter of Credit

A Confirmed Letter of Credit is a Letter of Credit issued by a foreign bank, which has been confirmed as valid by a domestic bank. An exporter whose form of payment is a Confirmed Letter of Credit is assured of payment by the domestic bank who confirmed the Letter of Credit even if the foreign buyer or the foreign bank defaults.

Consignment

Consignment is a delivery of merchandise from an exporter (the consignor) to an agent (the consignee) subject to an agreement by the agent that the agent will sell the merchandise for the benefit of the exporter, subject to certain limitations, like a minimum price. The exporter (consignor) retains ownership of and title to the goods until the agent (consignee) has sold them. Upon the sale of the goods, the agent typically retains a commission and remits the remaining net proceeds to the exporter.

Service For details go to Consignment Purchase »

Cross-Border Sale

A Cross-Border Sale refers to any sale that is made between a firm in one country and a firm located in a different country.

Factoring

Factoring is the selling of a company’s invoices and accounts receivable at a discount. The lender assumes the credit risk of the debtor and receives the cash when the debtor settles the account.

Service For details go to Accounts Receivable Factoring »

Invoice Discounting

Invoice Discounting is a type of loan that is drawn against a company’s outstanding invoices but does not require that the company give up administrative control of those invoices.

factoring invoices

factoring invoices is one of the most common methods of trade financing. Your company sells their invoices to a factor in exchange for immediate liquidity. The factor who purchases the invoices relies on the creditworthiness of the customers who owe the invoices, not the subject company.

Service For details go to factoring invoices »

Irrevocable Letter of Credit

Irrevocable Letter of Credit is a Letter of Credit in which the specified payment is guaranteed by the bank if all terms and conditions are met by the drawee.

Letter of Credit

Letter of Credit or LC is the most common trade finance solution in the world. A Letter of Credit is a document issued by a bank for the benefit of a seller or exporter, which authorizes the seller to draw a specified amount of money, under specified terms, usually the receipt by the issuing bank of certain documents within a given time.

Service For details go to Letters of Credit For Imports »

Open Account

Open Account is a trade arrangement in which goods are shipped to a foreign buyer without guarantee of payment. The obvious risk this method poses to the supplier makes it essential that the buyer’s integrity be unquestionable.

Service For details go to Open Accounts »

Pro forma Invoice

Pro forma Invoice is an invoice provided by a supplier prior to the shipment of merchandise, which informs the buyer of the kinds, nature and quantities of goods to be shipped along with their value, and other important specifications such as weight and size.

Receivable Management

Receivable Management involves processing activities related to managing a company’s accounts receivable including collections, credit policies and minimizing any risk that threatens a firm from collecting receivables.

Revocable Letter of Credit

Revocable Letter of Credit is a Letter of Credit that can be canceled or altered by a buyer after it has been issued by the buyer’s bank.

Structured Trade Finance

Structured Trade Finance is cross-border trade finance in emerging markets where the intention is that the loan gets repaid by the liquidation of a flow of commodities.

Trade Credit Insurance

Trade Credit Insurance is a risk management product offered to business entities wishing to protect their balance sheet assets from loss due to credit risks such as protracted default, insolvency, and bankruptcy. Trade Credit Insurance often includes a component of political risk insurance, which ensures the risk of non-payment by foreign buyers due to currency issues, political unrest, expropriation, etc.

Project Finance Documents

› EPC Contract
› O&M Agreement
› Loan Agreement
› Offtake Agreement
› Supply Agreement

› Intercreditor Agreement
› Tripartite Deed
› Common Terms Agreement
› Concession Deeds
› Shareholder Agreement

Project Finance Participants & Stakeholders

The project company is the actual owner of the project. In project finance, which is off-balance-sheet financing, the project company must be a newly formed entity with no history, known as a Special Purpose Entity (SPE) or Special Purpose Vehicle (SPV).

The project sponsor is the individual or company that is organizing the project and has chosen the project finance, off-balance-sheet method of financing. If this were corporate finance or real estate finance the project sponsor would likely be referred to as a syndicator.

The project finance provider is the firm that is responsible for arranging the project finance loan and performing all of the work that is required to arrange and close the loan, such as preparation of the project documents. This is not the project finance lender.

Project financings typically involve very large amounts of money. The Project Finance provider arranges the project loan from the project lender or lenders, depending on the amount. But, because project finance is off-balance sheet financing, project lenders usually require the investment of substantial equity in the project. Project sponsors typically involve equity investors to spread the required capital and to share in the project risk. Equity investors may also stakeholders already and have a vested interest in the success of the project.

Project lenders provide most of the capital needed for project finance. Project lenders tend to be commercial banks, investment banks and even hedge funds. Regional development banks can also be project lenders.

Multilateral agencies are established by intergovernmental agreements to promote international and regional economic development. They can provide direct lending, political insurance to other lenders and even equity participation. They focus on projects in emerging markets and focus on socio-economic developmental rationale not just economic viability of a project.

Export credit agencies (ECAs) historically more relevant for financing projects in emerging markets due to the political risk cover obtained by commercial lenders who needed cover. This has changed in the wake of the global financial crisis, ECA finance is now a major source of global project lending.

The construction contractor for the project, who is also frequently referred to as an EPC Contractor enters into a contract with the project company to build the project. The construction contract usually takes the form of an EPC Contract, which is short for Engineering, Procurement and Construction Contract.

The O&M Operator is a management company or operator who contracts with the project company in a document known as an Operation & Maintenance Agreement to operate, maintain and manage the project for a fee for a fixed period of time, usually 2 to 5 years, but it can be longer.

Offtakers in project financings are buyers of the resources produced by completed and operating projects. Offtakers contractually agree in an Offtake Agreement to purchase all or substantially all of the future production from the project. Offtake Agreements are negotiated prior to the development of the project which will become the means of production of the resources being sold to the Offtaker. When projects produce resources like electrical power or natural gas, Offtakers are vitally important to their success. They lock-in a significant amount of future revenue and allow the project company to account for recurring sales and profits for many years into the future.

Participants & Stakeholders

Project Finance Participants & Stakeholders

The project company is the actual owner of the project. In project finance, which is off-balance sheet financing, the project company must be a newly formed entity with no history, known as a Special Purpose Entity (SPE) or Special Purpose Vehicle (SPV).

The project sponsor is the individual or company that is organizing the project and has chosen the project finance, off-balance-sheet method of financing. If this were corporate finance or real estate finance the project sponsor would likely be referred to as a syndicator.

The project finance provider is the firm that is responsible for arranging the project finance loan and performing all of the work that is required to arrange and close the loan, such as preparation of the project finance documents. This is not the project finance lender.

Project financings typically involve very large amounts of money. The Project Finance provider arranges the project loan from the project lender or lenders, depending on the amount. But, because project finance is off-balance sheet financing, project lenders usually require the investment of substantial equity in the project. Project sponsors typically involve equity investors to spread the required capital and to share in the project risk. Equity investors may also stakeholders already and have a vested interest in the success of the project.

Project lenders provide most of the capital needed for project finance. Project lenders tend to be commercial banks, investment banks and even hedge funds. Regional development banks can also be project lenders.

Multilateral agencies are established by intergovernmental agreements to promote international and regional economic development. They can provide direct lending, political insurance to other lenders and even equity participation. They focus on projects in emerging markets and focus on socio-economic developmental rationale not just economic viability of a project.

Export credit agencies (ECAs) historically more relevant for financing projects in emerging markets due to the political risk cover obtained by commercial lenders who needed cover. This has changed in the wake of the global financial crisis, ECA finance is now a major source of global project lending.

The construction contractor for the project, who is also frequently referred to as an EPC Contractor enters into a contract with the project company to build the project. The construction contract usually takes the form of an EPC Contract, which is short for Engineering, Procurement and Construction Contract.

The O&M Operator is a management company or operator who contracts with the project company in a document known as an Operation & Maintenance Agreement to operate, maintain and manage the project for a fee for a fixed period of time, usually 2 to 5 years, but it can be longer.

Offtakers in project financings are buyers of the resources produced by completed and operating projects. Offtakers contractually agree in an Offtake Agreement to purchase all or substantially all of the future production from the project. Offtake Agreements are negotiated prior to the development of the project which will become the means of production of the resources being sold to the Offtaker. When projects produce resources like electrical power or natural gas, Offtakers are vitally important to their success. They lock-in a significant amount of future revenue and allow the project company to account for recurring sales and profits for many years into the future.

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