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Project Financing: Key Elements in Project Financing

Updated:2017-12-29 16:41:01    Source:www.tannet-group.comViews:536

Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. One of the primary advantages of project financing is that it provides for off-balance-sheet financing of the project, which will not affect the credit of the shareholders or the government contracting authority, and shifts some of the project risk to the lenders in exchange for which the lenders obtain a higher margin than for normal corporate lending.

Usually, a project financing structure involves a number of equity investors, known as 'sponsors', a 'syndicate' of banks or other lending institutions that provide loans to the operation. The financing is typically secured by all of the project assets, including the revenue-producing contracts.

There are several parties in a project financing depending on the type and the scale of a project. The most usual parties to a project financing are:
Sponsor (typically also an Equity Investor)
Lenders (including senior lenders and/or mezzanine)
Contractor and equipment supplier
Financial Advisors
Technical Advisors
Legal Advisors
Equity Investors
Regulatory Agencies
Multilateral Agencies / Export Credit Agencies
Insurance Providers
Hedge providers

The key elements of the typical project financing structure for a build, operate and transfer (BOT) project are:
1. Special purpose vehicle project company with no previous business or record;
2. Sole activity of project company is to carry out the project – it then subcontracts most aspects through construction contract and operations contract;
3. For new build projects, there is no revenue stream during the construction phase and so debt service will only be possible once the project is on line during the operations phase;
4. Sole revenue stream likely to be under an off-take or power purchase agreement;
5. There is limited or no recourse to the sponsors of the project;
6. Project remains off-balance-sheet for the sponsors and for the host government.

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