Advantages of Project Financing

There are many things to consider in project finance. This section  will learn about a few important concepts and the parties involved in  the process.

Project Development: Project development is an  important concept in project finance. As financing is done on the  sequential progress of the project, understanding project development is  important. There are three stages in project development –

• Pre-bid stage
• Contract negotiation stage
• Money-raising stage

Parties Involved: There are many parties involved in project finance. Let’s look at all these parties in brief –

• Sponsors: People who sponsor the project.
• Lender: Financial institutions that lend money for the project.
• Financial advisors: They help the parties to understand how much return on investment they can make. They can be on both sides – lenders or borrowers.
• Technical advisors: Often for effective execution of the project, technical consultants are hired. They act as technical advisors for the project.
• Legal advisors: As the name suggests, they help in legal matters.
• Debt Financier: People who give secured loan for the project on the basis of project assets.
• Equity Investors: People who invest the money in lieu of shares.
• Regulatory agencies: Generally, government authorities who take care of the regulations in regard to the project intricacies.
• Multilateral agencies: The agencies are part of the World Bank group.

Financial Model: The sponsor who will invest in the  project needs to know how the project will do. Thus they take the help  of an expert to do the financial modeling to understand how the project may go in the future. He will also get an  idea of how much projected cash-flow he can expect. On the basis of  that, he will decide to invest. Actually, the financial model is a  spreadsheet that is being used for calculating the financial model.

Document required: There are a few documents that are of utter importance. Let’s have a look at them –

• Shareholder/sponsor documents
• Finance documents
• Project documents
• Other project documents

 Pre-requisites :

1. Secure Offtaker agreement ( Pre production purchase order from the assured buyer )
2. Feedstock agreement ( Pre production purchase order to the supplier/vendor of raw for assured supply of raw material 
3. Healthy Balance Sheet of the Project Owner 
4. The SPV is formed between the Bank, Project Owner, Offtaker and the Feedstock supplier 
5. No hard asset is hedged as collateral 
6. No Margin Money Required as the whole funding is provided as debt 
7. The project is risk rated by International Rating Agency 
8. The funds are underwritten by an International Insurance Agency of choice of the Senior Lender 
9. Senior lender participates in the SPV to monitor the deployment of the funds 
10. The interest rates varies from 3%-5%depending on the risk of the project 
11. The funding is done through Foreign Direct Investment Route and the currency of payment can be in $USD or €Euro or  £GBP 
12. 42% of the net revenue is retired as debt and tenor is calculated backwards up to 7-10-15-20 years 3.m Bullet payment without penalty is allowed 
13. Senior lender, Bank and all the other stake holders except the Project Owner exit the SPV after the retirement of Debt