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Project Financing From Commercial Sources – Part 1

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Tuesday, November 7, 2017 10:00AM / Brickstone Partners 

This article describes the various Project Financing from Commercial Sources in Local and International Lenders. A project sponsor is in charge of securing the financing and general asset spending endorsement, and claims the open doors and dangers identified with the money related result of the project. Project sponsors may include government department, international agencies, public corporations or parastatal entities. The sponsor’s objective may include political, material inputs, marketing, technical, management and financial aspects, but they usually relate to the sponsor’s wish to exploit its particular resources. 

The owner of the project and the project sponsor do not have to be the same, and on many major capital projects the shareholders of the sponsor can only guarantee the large financial resources required by using the project‘s future cash flow, hence the term “project finance”. The aim of most project financing is to arrange borrowing for a project which will benefit the sponsor and at the same time be completely non-recourse to the sponsor (i.e. in no way affect its credit standing or balance-sheet). Hence, project financing is often referred to as off-balance-sheet financing. Few projects are financed independently on their own merit without credit support from sponsors or other interested third parties. 


Types of Capital
There are three main types of capital available to finance project through either off- balance-sheet finance. These are explained below. 

“Equity” investment: represents the risk capital and most junior debt. It provides the basis for lender or investors to advance more senior forms of capital to the project. 

Quasi-equity: represents the loans or advance made to a project, and are senior to equity capital, but junior to senior debt and secured debt. 

Senior debt: can take the form of either secure or unsecured loans. Most borrowing from commercial lenders for project financing will be in the form of senior debt. Senior debt has priority of payment if the borrower gets into financial difficulty. Commercial loans are the most important sources of senior debt for project financing and may involve a single lender, several lenders or a loan syndicate. 

These types of capital may be in the form of construction loans, long term loans, or working capital loans. The following details should be covered in the loan agreement:
 


·        
The amount which may be borrowed;

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Commitment fees for overdraft or term loans that are not fully used;

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Term of the loan and repayment schedule;

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Interest rate on the outstanding balance;

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Procedure for take-down and conditions precedent for the take-down;

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Representations and warranties (i.e. guarantees that loan will be available) of the borrowing;

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Legal opinions which will be required at the close of the loan agreement;

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Affirmative covenants (i.e. agreements relating to specific action to be taken);

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Financial covenant (i.e. financial agreements);

·        
Responsibility for any withholding of tax on interest;

·        
Enforceability of the right of the lender. 

The element of risk associated with the provision of a loan must be reflected in the interest rate. Moreover, there are several mechanisms available that can be used to reduce the cost of borrowing by decreasing the lender’s risk. 

Unsecured loans:
Unsecured loans are available when the debt is backed by the general credit of the borrower, and is not secured by a security interest in any assets or pool of assets. This is often to as “name lending”. Unsecure loans are available to projects whose sponsors, owners and managers have established good reputation with the financial community and where sufficient capital or subordinated loans have been provided to meet the equity risk capital requirement of the project. 

Secured loans:
Secured loans are available to most project where the assets securing the debt have value as collateral; such assets must be marketable and readily convertible into cash. The collateral of real property, personal property, payment due under a take-or-pay contract and assignment of contractual right are all used as collateral under project financing. 

Syndicated loans:
Commercial banks in Nigeria are the largest source of project loan, but tend to limit their commitment to between two and five years, with floating interest rate based on NIBOR or the MPR Rate. However, longer loan period can be negotiated and fixed interest rate loans for five to ten years maturity are sometimes available if there is liquidity. 

The size of some project is such that the large loans required to finance them have to be provided through syndicated international commercial bank. The general advantages of the syndicated loan market are that;

·        
Substantial amount of debt can be raised;

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Loans may be made in any of several currencies;

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Risk can be shared;

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Banks involved in syndicated loans are sophisticated and are able to understand and participate in the complex credit risk presented by project financing;

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The take-up date of loan can be flexible; and

·        
Pre-payment is customarily permitted. 

Commercial finance companies:
Large commercial finance companies are another potential source of funds for project financing. Compared to banks or insurance companies, finance companies do not have a depositor base of policy-holders as a source of funds. They must buy their fund in the debt markets and re-lend at a spread. Consequently, funds from commercial finance companies tend to be highly priced and limited in volume. Other sources of fund-raising include leasing companies, and so on. 

Normal balance sheet financing:
Banks providing normal balance sheet lending must satisfy themselves that the borrower’s total financial structure is sufficient to pay interest as well as repay the loan. In normal balance sheet financing, a company will borrow money from a bank, the debt will appear on the company’s balance sheet, and in most cases the assets shown on the company’s balance sheet will act as the banks’ security. However, if the company wishes to invest in a specific project, it is possible to safeguard the company’s asset by creating an off-balance-sheet arrangement. 

Some of the instrument used to raise fund to finance project are listed below:

·        
Commercial sources (equities and debt: commercial banks, etc.)

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Syndicated bank and Eurodollar loans;

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Eurodollars;

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Eurodollar bonds;

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Leases;

·        
Commercial paper market. 

Pure Project Financing
There is a wide range of financing alternatives accessible; however loan specialists will typically require some kind of security to be offered. Pure project financing will just happen when the credit’s security is totally based on the project cash flow. Attributable to the mind boggling nature of most projects, it is once in a while conceivable to accomplish this circumstance. Loan specialist giving project financing must along these lines guarantee that there will be sufficient income created by the project to pay intrigue and reimburse capital after every other cost have been met (e.g. running expense, charges). In the project financing, the loan specialist will in this way assess the project in detail, instead of the activists of the support. Project financing is now and again alluded to as cockeyed sheet fund or non-response back. 

The explanations behind choosing project financing to accomplish the support’s target could be to:
 
·         Enable the support to embrace a project that would have generally been unthinkable and to get the advantage of a huge capital resources without financing it;

·        
Minimize the support’s value commitment by drawing in different financial specialists from either the private or the general population segment;

·        
Shift a portion of the hazard far from the support on to the project;

·        
Help the support to raise advance on preferred terms over would have been accomplished through direct getting; and

·        
Keep the project advance of the support’s monetary records and accomplish a larger amount of equipping. 

The utilization of these terms can some of the time deceive ‘reeling sheet fund’ implies that the back isn’t given by a credit secured against the accounting report resources. “Non-plan of action back” implies that there are no credit reimbursement ensures gave by either the borrower or the parent organization. 

The utilization of certifications can regularly give moneylender a misguided sensation that all is well and good. It ought to never be accepted that certifications can without much of a stretch be authorized. Underwriters can discover many reasons for non-installment and the loan specialist must hold its rights. The current disappointments in Italy, where the Government is declining to acknowledge obligation for the as yet exceptional advances of one its entirely possessed auxiliaries, feature the issue 

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