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Project Finance

Project finance includes funding of Industrial Projects, Infrastructure Projects (Energy, Telecommunication, Transport & logistics, etc), Services Projects, and other financial structures. Project Finance candidates include greenfield projects or expansion of existing projects. 

Project finance involves a “ring-fenced” structure, wherein the Project is separated from the Sponsoring company (Project owner) by undertaking the Project in a Special Purpose Vehicle (SPV).


Project Finance Features:

  • SPV Structure: Project is developed in and owned by SPV; hence the lenders/Banks claims are restricted to the SPV and its cash flows, which is a shift from corporate lending structure wherein the Banks have full recourse to the Project Owners.

  • Project Finance is Isolated: Project Finance structure involve lenders having full recourse to the assets and cash flows of SPV. The Project Debt is amortised and repaid from the cash flows of SPV. Project Finance structures ensures that other lenders of the Project Sponsor do not have any recourse to the SPV.

  • Project Debt: The amount of debt that can be mobilised in Project Finance is based on the Projects ability to repay debt from the cashflows generated by that project.

  • Non-recourse or limited recourse:  The project debt is repaid solely from the cash flow of the SPV. The recourse of project debt is to assets and cash flow of SPV. No recourse to Project owners.

  • Structure determination: The structure of project financing relies on future cash flows for repayment of the project finances. The assets and rights held under the project act as collateral for the finance.

  • Terminal Value: Usually there is no Terminal Value in Project Finance which is partly due to the long-term nature of the assets, and the size of the assets.


Advantages of Special Purpose Vehicle (SPV)

  • Ring Fenced Structure: An SPV (Special Purpose Vehicle) ensures that a financial difficulty/default at the Project Sponsor level does not travel to the SPV.

  • Financial independence: Amount of Debt mobilised at SPV is limited to the maximum debt that can be serviced from the cashflow of SPV, which makes SPV financially independent

Why Project Finance?

  • Isolate Project Risk: If a Project is funded as corporate finance; a default at project level could place the corporate at risk. Project financing being riskier than corporate operations; hence, needs to be isolated from existing operations of a corporate to avoid contamination risk.

            Likewise, a default at corporate operations of the  Project owner is isolated from SPV.

  • Off-Balance sheet:  Project Finance usually remains off-Balance sheet for Project owner company

  • Higher IRR: Project finance usually has higher leverage than leverage at corporate level, which has a positive bearing on the Project IRR for the Project owners.

  • No impact on existing cashflow: Project Debt has recourse to project cash flow and does not consume the existing operational cashflow of the corporate (Project owner).

  • Existing Banking limits remain unutilised: Project Finance ensures that the banking limits extended by the banks of Project Sponsor are not utilised for Project Finance


Project Finance Risks

Project financing is for projects which carry high risks on the capital employed. There is no revenue for the companies participating until the commencement of operations. During the construction phase, there may be one or two offtake agreements, but no revenue streams. There is no recourse available to the parties funding the projects.

The risks associated with project finance are as below:

  • Construction Risk

  • Operational Risk

  • Supply Risk

  • Offtake Risk

  • Repayment Risk

  • Political Risk

  • Currency Risk

  • Authorisation Risk

  • Dispute Resolution Risk

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