Project finance: where and how it is used

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What are we talking about? Project financing is a way to attract investments from large market players (often with state participation) to implement a large-scale and expensive project. It involves the participation of borrowed capital.

How does it work? The decision is preceded by a deep technological, legal, financial analysis, and an assessment of the risks associated with project financing. At subsequent stages, documentation is collected and financing forms are agreed upon.



In this article:

The essence of project financing
Participants and morocco email list risks of project financing
3 Basic Principles of Project Finance
Features of project financing
Project financing documentation
Preliminary analysis and evaluation of the project financing object
Stages of project financing
Frequently Asked Questions about Project Finance

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The essence of project financing
The terms "project finance" and "project financing" are not synonymous. There are many different methods of financing, and project finance (PF) is just one of them.

The PF involves the allocation of credit funds for a specific project based on an assessment of its future cash flows. To implement such an idea, a new company is usually created, known as an SPV (special purpose vehicle) or SPE (special purpose entity).

The process of investment project financing can be compared to assembling a construction set: the loan amount, repayment terms and other conditions are selected individually depending on the specifics of each construction project.

The essence of project financing

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Goals that can be achieved through project financing:

The PF facilitates the implementation of the initiative for medium and small-sized sponsors. Such investors cannot freely use capital markets, unlike large companies.

Project finance allows the sponsor to share the risks of the project with other participants, especially if they include a lender who does not require full returns.

Using project finance also helps to increase profits by raising more debt.

Sponsors often choose project financing, even if it is more expensive, because it does not impact their overall corporate credit.

Having multiple backers involved in funding an idea simplifies the process and helps the entire group, including those with lower credit ratings, secure the required level of project funding.

In international projects, the participation of several lenders and large banks reduces political risk in unstable countries, since the government is unlikely to want to interfere with the project and its financial flows.

Some types of project finance may offer more favorable terms, which can help reduce the cost of capital for the initiative.

PF allows for careful planning of project structure and risk management, reducing the likelihood of failure for both sponsors and lenders.

When choosing a PF method, the following characteristics are taken into account:

the project that is financed must be legally and economically independent;

financing occurs through a special legal entity created to implement this idea;

The PF is used for new initiatives, although refinancing of existing ones is possible;

in project financing, the share of borrowed funds, as a rule, significantly exceeds the amount of equity capital;

the bank evaluates the project primarily based on expected cash flows, rather than on the value of the organization's assets or its past financial performance;

The main guarantees for the credit institution are the contracts concluded by the design organization.

Project financing works as follows: money is invested in the project, and borrowed funds can make up 70-90% of the total amount. Sometimes the bank is ready to finance the project 100% using property as collateral. Usually the loan is provided in stages, depending on the degree of implementation of the business plan.