Resurgent India - Pioneer Project Financing Advisory Company
March 23, 2021
Admin
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Project Financing refers to the funding of long-term infrastructure and industrial projects based on projected cash flows of the project. The repayment of this loan can be done using the cash flows generated when the project gets completed. In case the borrower fails to repay the loan, the lender has the right to take control of the project.
To bridge the gap between lenders and borrowers, Special Purpose Vehicle (SPV) is formed by the promoters. SPV is responsible to supervise fund procurement and manage the project in order to make the project success.
Key Features of Project Financing
Project Financing involves a significant amount of money and it is always better to understand its key features completely.
- Capital Intensive Financing Scheme: Project financing is availed by ventures that require a huge amount of equity and debt and is generally more relevant in developing countries as it leads to the rapid economic growth of the country. The costs in this financing scheme are higher and therefore involves large amount of debts.
- Risk Allocation: The risks under the financing scheme are allocated and divided among various stakeholders like sponsors (promoters), lenders, and the regulatory agencies. While the sponsors have the limited liability as promoters the lenders take credit risk and regulatory agencies provide the requisite support and clearances.
- Multiple Participant Availability: Since the project financing caters to long-term finance, multiple parties can be included as promoters to assure the smooth flow of the project, and availability of equity.
- Asset ownership Decision: The special purpose vehicle ensures the smooth flow and management of the project. When the project gets completed, and the entire debt is repaid the asset ownership is transferred to the concerned party/concession authority as per the decided terms of the loan.
- Minimal Recourse Financing Solution: The sponsor can focus their attention on the projections of the cash flows and the viability of the project. Under minimal recourse financing, the loan is expected to be paid out of the future cash flows instead of the individual strength of the promoters. Project financing companies thus needs to check the cash flows as the primary source of repayment.
- Loan Repayment through Cash Flow of Project: The terms of project financing, the excess cash flow should be utilized to pay off the outstanding debt by the borrower. Gradually as the debt is paid, it minimizes the financial risk exposure.
- Improved Tax Treatment: When the project financing is implemented, the contributors are offered favourable tax rates. Thus the sponsors prefer this structured financing solution to avail long-term benefits.
- Sponsor Credit does not influence Project: Apart from offering long-term fund benefits, in project financing, the other borrowings of the sponsor do not have any negative impact on the project itself ( the promoters however should not be a defaulter with banks).
Stages of Project Financing
- Pre-Financing Stage: Before commencing the project financing, certain steps need to be followed. These are discussed below:
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Identification of the Project Plan: The project financing companies identify and analyze the viability of the project and ensure the feasibility of the project.
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Risk Minimization: This is one of the most crucial parts of the process. Before commencing the project financing, the project financing companies evaluate the level of risk involved and cater to tools to minimize all kinds of future risks.
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Ensuring project Feasibility: All the concerned factors are deeply analyzed by the project financing companies to ensure the feasibility of the project before commencing it.
- Financing Stage: Being the main body of the process, its sub-categories are discussed below:
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Finance Arrangement: In this process, funds are arranged by the project financing companies and borrowed from the banks/institutions whose goals are in alignment with the project.
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Debt Equity Negotiation: In this step, both borrower and project financing companies negotiate and decide on the loan and equity ratio and decide on the same.
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Documentation and Verification: When the loan amount is mutually decided, the terms of the loan are documented based on the features of the project.
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Payment of Funds: Once the documentation is completed, the borrower receives the agreed amount of funds to perform project operations.
- Post-Financing Stage: Being the last stage of the project financing process, it involves the following steps:
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Consistent Project Monitoring: The project manager monitors the project at regular intervals to ensure smooth flow of the process.
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Project Closure: In this step, the project comes to a closure.
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Repayment of Loan: The cash flows from the project are utilized to repay the loan amount.
Project financing investments have seen an upsurge in past few years as it is a long-term, limited recourse financing scheme that is used in funding projects with huge capital.
Resurgent India is a pioneer in project financing and is among one of the top project financing Advisory companies in Gurgaon and India. Their panel of professionals ensures a smooth flow of operations and provide quick project financing solutions. The team provides its potential clients with strategic planning solutions that are in sync with their long-term objectives.
