Long-Term Project Finance: All You Need To Know

Long-Term Project Finance: All You Need To Know

October 19, 2022 Admin
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Long-term funding/financing for industrial and infrastructure projects based on a non-recourse financial structure is referred to as Long Term Project Finance. The structure often includes a syndicate of lending institutions and multiple equity investors as sponsors. Due to the capital-intensive, high-risk, and time-consuming (long gestation period) nature of such projects, independent projects of a corporation necessitate the finesse of Project Finance approaches. In such circumstances, capital is injected through the Project Finance model based on the projected cash flow from the project, with most of the project assets and cash flows maintained securely. Since it allows firms to fund huge projects off-balance-sheet, project finance appeals to the private sector (OBS).


Sponsors in project finance

Each project sponsor has a distinct aim for investing in the project finance venture, which may differ depending on the sponsor type.  In such deals, four categories of sponsors are typically involved:


  • Industrial sponsors, who are often associated with a downstream or upstream organization, are an important part of project finance. Examples: The Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI)
  • Public sponsors, for example, include national and local governments, municipalities, and municipalized businesses concerned with social welfare, etc.
  • Contractors/sponsors - Companies that design, build, or run large plants and are interested in participating in the project by providing stock or subordinated financing for the project.
  • Financial sponsors/investors – Firms that participate in a project finance initiative with the explicit goal of investing funds in high-profit transactions. Example: SBICAP.
Long-Term Project Finance: All You Need To Know

Key features of project financing

  • Non-Recourse FinancingLong Term Project finance is generally a non-recourse loan owed to both individual shareholders and project sponsors. In the event of a default, neither the borrower nor the borrower's shareholders hold any liability.
  • Risk allocation: Project financing deals are typically riskier than traditional corporate finance transactions. Due to the increased risk exposure, apportioning the risk in the contract is usually crucial for long-term project finance loan approval. The risk allocation process, which is carried out in the project documents, aims to match risks and associated returns to the parties involved in the transaction who are most suited to handle them.
  • Multiple Participants: Another characteristic of project financings is that they always involve a large number of project participants. Given the large sums involved in project financings, project sponsors are often required to include equity investors on the list of project stakeholders.
  • Off-Balance-Sheet: The off-balance-sheet aspect of project financing appeals to both project sponsors and participants since project loans do not add debt to project sponsors' balance sheets and have no influence on their available borrowing capacity. The off-balance-sheet characteristic of project finance is especially appealing to government organizations because project debt and obligations do not affect their balance sheets, reducing pressure on an increasingly stressed fiscal setting.

Benefits of a Long-term project finance

  • eliminates or minimizes the lender's recourse to the sponsors
  • allows debt funding to be treated off-balance-sheet
  • maximizes a project's leverage
  • assists in avoiding any unfavourable impact of a project on the sponsors' credit standing
  • enables lenders to appraise the project separately and independently
  • aids in obtaining better tax treatment for both the project and the sponsors.

What Are the Various Stages of Project Financing?


Pre-Financing Stage

Project Plan Identification - This process includes identifying the project's strategic plan and determining whether it is feasible. This is a crucial step as it ensures the project plan is in line with the goals of the financial services organization.

Detecting and Lowering Risk - Risk management becomes an integral component of the entire project financing endeavour. To avoid future risks, the lender must be well-versed in the availability of resources.


Examining Project Viability

A lender must thoroughly investigate the financial and technical viability of all the associated aspects of the concerned project before making any investment.


Financing Stage

It is the most crucial part of Project Financing and is sub-categorized into the following:


Arrangement of Finances 

The sponsor must get equity or a loan from a financial services firm whose objectives are aligned with those of the project.


Loan or Equity Negotiation 

This stage is used to negotiate the loan amount between the investor and the borrower and reach a consensus.


Documentation and Verification

In this step, the loan terms are unanimously agreed upon and documented while keeping the project's policies in mind.



The borrower receives the agreed fund for executing operational activities after the loan documentation is completed.


Post-Financing Stage

The final stage entails timely project management by the project manager, project closing, and loan payback.


Muthoot Finance Ltd, L&T Finance Limited, Tata Capital Financial Services Ltd, Aditya Birla Finance Ltd, HDB Financial Services, and Power Finance Corporation Limited are examples of project financing companies in India.


Top Project Finance Company in India

Resurgent India Ltd, a SEBI registered Category-I Merchant Banker, is a top-of-the-line firm that provides project finance services in India. It has a talent pool of experienced professionals and its in-depth understanding of the nooks and corners of the market speed up the project funding process.

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