Seeking to register a project financing company? Read on to find out how!
Project Finance Explained
‘Project financing’ stands for a highly specific form of lending used under very particular circumstances (e.g. for non-recourse or partial recourse financing of a specific asset or project). It can be perceived as a kind of enclosure in which the walls are custom-built to the lender’s demands. The funds to be lent go into the enclosure and then leave it in the form of repaid interest and loans, once the product for which the funding is required is sold. Here are some of the most typical features of project financing:
- repayment of loans is made entirely out of proceeds received from implementation of a specific project;
- continuous funding for the project is absolutely vital
- a special company (or SPV) needs to be set up for the implementation of the project
- creditors require some kind of collateral
Looking for legal advice pertaining to project financing? IQ Decision is the answer! Our lawyers can provide you with exhaustive information on the subject!
If you are considering getting into project financing, you should bear in mind that it is substantially different from other forms of corporate financing. What makes it different is that the lender is more preoccupied with the overall asset value rather than specific contractual provisions pertaining to a particular subgroup of assets. Unlike structured lending in which assets of a specific type are consolidated and combined with derivatives, project financing is all about controlling risks through concentration of assets in small or separate groups.
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Challenges Related to Project Financing
If you thinking about opening a project finance organization, you should keep in mind that finding funding for it can be very problematic, especially if the project depends on a single or small subset of assets.
It gets even riskier if there is only one one source of funding to be used for repaying the loan. This pushes the cost of project financing even higher, making it much more expensive than other types of corporate financing.
Another potential risk is that the loan can only be repaid with the funds obtained from project cash flow. Therefore, the creditors are particularly interested in making sure that cash flow remains uninterrupted. Thus, project financing places significantly more restrictions and information demands on both the lender and the borrower.
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What Makes Project Financing Attractive?
Project financing is attractive for a number of reasons. Here are some of them:
- Some high-value projects require substantially more capital than general corporate financing can provide
- Possibility for sponsors to share risks with others
- Increased return on capital investment
- Liabilities do not appear on companies’ balance sheets
- Funding a project by a group of investors can significantly streamline the entire process
- Fewer risks of funding projects in countries with an unstable political situation
- Tax cuts
- Managing risks becomes more effective
Planning on registering a project finance company? Keep in mind that you may need some legal advice on licensing finance project activities. Where to get it? IQ Decision is the answer!
Types of Project Financing
- Energy-related projects (electricity, oil and gas) are the most heavily funded ones when it comes to project financing. The risks here are much higher but the return on investment is also much higher.
- Resource extraction projects - the second largest group of projects that rely heavily on project financing. And for the same reasons that are listed above.
- Public infrastructure projects (roads, bridges, dams, stadiums, etc.) are the third largest group of projects that require project financing. What makes project financing so attractive for governments is that they can increase their expenditure without having to increase projected revenue. That is a very convenient way of reducing budget deficit.
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Sources of Project Financing
Funding can come from different sources, including capital markets (e.g. public issuing of bonds), creditors (including multilateral ones), state financing (e.g. state-issued bonds), banks, and all kinds of insurers. Some of them place fewer limitations on the project but they can be much harder to lift.
Project funding for larger scale projects may come from several different sources.
Basic Project Structure
The structure of project financing may seem quite complicated due to the multiple contracts and interwoven relations involved in it. For the sake of simplicity it can be divided into several categories, such as equity contracts, government contracts, supply contracts, construction contracts (funding construction projects is one of the most popular forms of project financing), operation contracts, maintenance contracts, and funding contracts.
Looking for legal help with drawing up project finance contracts? IQ Decision is the answer!.
Evolution of Project Financing
There have been some changes on the market of project financing recently. This has affected the way in which deals get financed. That, in turn, has led to some lenders leaving the market and EU banks placing limitations on certain sectors. However, despite the changes, the project financing market still remains one of the most essential elements that helps supports a wide range of projects around the world. .
IQ Decision UK is closely monitoring the latest developments in the project finance sector and is ready to provide legal advice on any of them
In particular, we can provide legal advice on matters pertaining to funding investment projects, as well as legal support in obtaining a project financing license.