Project Finance: Lender Perspectives and Development Trends

Project Finance: Lender Perspectives and Development Trends

December 11, 2020 Admin
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Are you looking for ways to obtain finances for the project? It is time to consider obtaining financing from a project finance company to meet your funding requirements. Project financing means financing a specific economic unit created by sponsors, and funding is obtained exclusively for the project. The value of the project is created by reducing the cost of funding and minimizing corporation taxes. The costs associated with market imperfections are also reduced.

Project funding is complicated and has a high cost of borrowing compared to traditional financing methods. The project finance company assesses every case of project funding in detail. Approval and disapproval decisions are taken based on a thorough assessment. If you plan to go for project financing, we have come up with all the necessary information for you. 

Project Finance: Lender Perspectives and Development Trends

Characteristics and Players of Project Finance

There are five distinct features of project financing transactions. Let us delve deeper into each one of them:

  1. The project finance is generally on a ‘Non-recourse lending’ basis. 
  2. This trend of the project independent of the individual liabilities of the sponsor is to be assessed.
  3.  The responsibility of managing the project risks is given to those possessing excellent management skills. 
  4. Sponsors give collateral to the lenders by way of securing the cash flow and assets linked with the project. 
  5. Finally, the cash flow generated must be enough to cover operating cash flows and help pay the debts, besides generating a reasonable return on the investment. 

Key sponsor issues

If you want as a sponsor that the project finance company should agree to give the loan, then you need to work on the following things:
Respective roles: Every sponsor must be clear about his role. All these tasks are on the list of the sponsor group as a part of the documentation. Understanding the role is therefore important. 
Dividend distribution policy: Dividend distribution policy is often a cause of debate among various sponsor groups. Most of the sponsors are willing to earn profits at the initial stage. However, the profits wouldn't come until the project is established, and the lenders are then paid the loan. 
Management of the project as a special purpose vehicle (STV): Will the project have a single sponsor, or will they have more than one sponsor? If one or more sponsors are a part of the project, the lender would be interested in an agreement among sponsors and the project finance company

Project Finance: Lender Perspectives

The sheer scale of various projects indicates that a single lender generally cannot finance the project, so a lenders consortium led by a syndicator comes together to render support to the project. In international projects, banks from the host countries offer financial support to the project. The banks which arrange the loans are the original signatories of the loan agreement. In these cases, the arranging banks take the risk and will sell down the loan gradually. These banks are project finance companies that offer support to these projects at the time of need. 
Project funding is a specialized area of project finance, and risk assessment must be performed before supporting a project financially. The syndicator has a lot of experience and the banks lacking it don't participate in such projects. 
A highly experienced bank or lender must be chosen to obtain funds for the project as a whole. 


Development trends in project financing

Project financing has been implemented in various sectors, and profits were obtained from it. Funds for natural resources, electric power, and transportation have risen steadily in the last four decades compared to other funding options. 
In the international scenario, the project funding market is smaller than the total value of corporate bond issues but greater than the funds raised through initial public offerings. However, in India, the corporate bond market is still not very mature and therefore the role of project finance companies is more important.  

When it comes to financing, sponsors have been coming up with more structured deals as they want to shift the companies' market deals to the buyers as early as possible. Various hybrid structures are implemented to mitigate the risks and have the ability to expand the boundaries in new asset classes. Public-Private Partnerships are an example of project financing with lower market risk coverage, or there is an intervention of the government for the development of public works. 


The Bottom Line

Choose a project finance company which is highly experienced and follows proper procedures as a lot of money is involved in it. Borrow money from them for your projects and earn enormous profits. You can pay back the funds to the lenders later on. Those who are willing to expand their business shortly can reap benefits from it instead of borrowing from anywhere else. 

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