Project financing, as a separate discipline with its own know-how, successful experience, specialist literature and professionals working in this business, has appeared in the financial sphere relatively recently, less than 25 years ago. The reason is obvious – the growing needs of industry could not be satisfied by standard banking transactions of the type “loan to the borrower against 200% of the borrower’s marketable collateral”.
Project financing is built on a principally different approach – partnership and risk sharing among participants. In this approach:
the project initiator (sometimes called sponsor) must secure some risks of the project with his own funds (various types of cash or capital investment in the project) – usually up to 30%;
the debt financing arranger provides the remaining amount of the required financing (bank loan, placement of securities, issue of bonds or some other suitable method).
It is important that in debt financing the project initiator does not have to provide full collateral (the recourse is limited). This does not mean that the creditor, for example, a bank, will protect its risks with reasonable security – it is simply different and initially in no way connected with the initiator’s equity funds. The main security of the loan is, as a rule, clearly formulated contracts for sale of products manufactured in the course of the project, such as off-take or takeor-pay, as well as, naturally, all assets (equipment, real estate etc.) purchased with either debt or borrower’s equity funds (sponsor’s, initiator’s – theoretically, this may be the same person, although usually the borrower is a specially created company – Special Purpose Vehicle – which ensures better transparency of the project).
Project financing is one of the most complicated mechanisms for arranging investment projects because it requires a serious substantiation of the feasibility and effectiveness of the project. And that, in its turn, requires highly professional and quite expensive project preparation (as compared to traditional bank credits) and also the following:
a) a stable raw material base;
b) super-advanced tested production technologies;
c) a guaranteed solvent system of sales.
The special complexity and the larger part of expenses during the project preparation stage are associated with the necessity to thoroughly prepare contracts for engineering services, state-ofthe-art equipment, technologies and construction. Sometimes EPC (Engineering, Procurement and Construction) contracts have to be signed, which means not only turnkey implementation(which is the usual practice), but also the transfer of responsibilities to the general supplier or general contractor and, accordingly, of the management of the built industrial facilities until the time when the manufactured product’s quality, quantity and guaranteed sales reach the level specified in the business plan.
The preparation of the project for implementation using project financing methods is almost impossible without professional consultants working in the relative field. That is why SOLEV often welcomes clients that have been refused a number of times by financial institutions they had turned to. Having conducted expert evaluation of their projects, we often conclude that the reason for such a refusal was simple – the projects were not structured properly, that is, the documents did not comply with the rules and procedures accepted in project financing. Sometimes it is enough for us to restructure a project for it to “get second wind” and become successful.
When working on large-scale investment projects and programs, SOLEV often does not simply act as a financial and investment consultant – in accordance with our specialization – but also arranges project development and management by largest Russian and foreign specialist companies (architectural bureaus and design, engineering, developer, legal, construction and other organizations).
SOLEV adheres to the fundamental philosophy of the project financing theory – available project initiator’s equity funds (up to 30%) plus high financial and credit leverage – to concludes complex transactions in situations when project financing is considered the most appropriate method.