The Gist of Mr.s.ganesan – AGM (Retd) Fibre Member Presented a Paper on Project Financing Worldwide in World Tamil Economic Conference Held at Le Meridian Hotel, Chennai.

PROJECT FINANCING

Presented by

S.GANESAN

Assistant General Manager (R), Indian Bank

1. Defining Project Finance

It is financing of a long term project under infrastructure or industrial unit or public service scheme etc. for example, financing projects in sectors like road, rail, ports, dams, power plants, mines, industrial unit, large scale residential / commercial buildings etc. It is different from Corporate Finance because it involves financing a very specific Special Purpose Vehicle (SPV), set up by the sponsoring company.

1.1 Features

1. Large size, capital intensive and highly leveraged.
2. Of long life which requires complex legal documentation.
3. Asset specific which allows few diversification and which assets are the sole collateral of the project loan.
4. Large cash flows/earnings (revenue stream) on which the lenders depend exclusively for repayment of loan.
5. Project company is generally a special purpose vehicle (SPV)
6. Generates higher margin and fees to reflect lenders risk, mainly arising out of asset specific and long tenure of the project

 2. Sources of Financing

2.1 Internal Sources

1. Shareholders’ fund/Equity of the sponsoring company.
2. Equity from Non-owners like Private Equity (PE) Capital, Venture Fund, etc.
3. Retained profits.
4. Rights Issue from Shareholders.

2.2 External Sources

1. Loan from Financial Institutions and Non-financial Institutions, Banks, Finance Companies, Mutual Funds, Insurance Companies, Pension Funds.
2. Project Bonds.
3. Supplier Credit by Project Equipment Suppliers particularly where Project equipment is major part of project cost.
4. Export Credit Agency or Multilateral / Bilateral Agency Credit facility like EXIM Banks, IMF, World Bank etc.

2.3 Public Private Partnership (PPP)

For financing mainly infra-services like roads, power etc., on following modes:

1. Build, Operate, Transfer (BOT)
2. Build, Own, Operate (BOO) – Ports
3. Build, Operate, Own, Transfer (BOOT)

3. Key Debt Parameters

3.1 Loan Amount / Types

Say 60% to 80% of the market value of the project/property as the maximum debt.

Loan granted are typically for financing (a) land, (b) construction/building, (c) Plant & Machineries, (d) Preliminary & Pre-Operative expenses like interest before commencement of commercial production etc.

3.2 Repayment

1. Grace/moratorium offered during construction.
2. Repayment schedule matched to the Project Cash Flow streams.
3. Early repayment option/clause in the agreement.
4. Overdue charges for delayed repayment.

3.3 Security / Collateral

1. Typically includes mortgage charge on land/building. preferably freehold land 
   1. leasehold land is acceptable but with suitable terms & conditions.
2. Hypothecation of Plant/Machineries, Consumable, movables.
3. Commercial insurance policy on mortgaged/hypothecated property.
4. Pledge of shares of the Borrowing Company.
5. Corporate Guarantee of Parent/Holding Company/sponsors.
6. Assignment of all project proceeds/revenue.
7. Personal guarantee of ultimate beneficial owners/sponsors/co-sponsors.
8. Charge on Escrow a/c of the borrowing company.
9. Direct Agreements between lenders and Key suppliers/Buyers.

3.4 Pricing

1. Interest charged is little more during construction period but is reduced during project operation.
2. Typical upfront fees
   1. Arrangement fee/Syndication charges
   2. Loan processing fees
   3. Legal fees/valuation charges
   4. Commitment charges on the un-drawn amount of the loan.
   5. Pre-payment fee

3.5 Conditions Precedent to draw-downs

1. All legal licences/permits/authorisation/approvals.
2. Clean legal opinion on the land opined by the approved lawyers of the lenders.
3. Property valuation by the approved valuers of lenders.
4. Satisfactory due diligence on the Borrower/Corporate/ Guarantor/Properties offered as securities etc.
5. Market value coverage generally should be more than or equal to 150%, periodically confirmed by the approved valuers/auditors.
6. Physical verifications of utilisation of funds by lenders representatives.
7. Registration of all collaterals with appropriate authorities.
8. Specified Escrow accounts with main lender / consortium leader through which all operations of the borrower are routed.

3.6 Financial Covenants

1. Market value coverage generally at least 150%.
2. Debt Equity Ratio = 2:1.
3. Debt Service Coverage Ratio > 1.5.
4. Current Ratio = 1.33 or more.
5. Earning Before Interest, Taxes & Depreciation (EBITD) reasonable according to project type.
6. Restrictions on dividend payment only after lenders NOC.
7. Modifications of project contracts only with lenders permission.
8. Reporting periodically by borrower to lenders.
9. Pay Back Period, Internal Rate of Return (IRR), Net Present Value (NPV) calculations.

3.7 Minimising Delays in Sanction by Banks/Finacial Institutions

1. Submit the comprehensive project Information Memorandum (IM) along with loan application.
2. Submit details about Borrowing Company’s/Sponsoring Company/their subsidiaries if any, their corporate structure, financing patterns, last 3 years actual financials, projections for the proposed repayment period.
3. Business Plan – identification of the Products & market.
4. Technical feasibility & Economic Viability (TEV) report on the project; peer product & market share.
5. Cash flow projections including assumptions based on which such projections are made.
6. Copies of all permissions/concessions/approvals/sale/purchase/ lease agreement, construction/other relevant contracts/agreements.
7. Proper documentation with the lenders before disbursement of lo

4. Post Financing Issues

4.1     Monitoring & Review of Project Implementation.

4.2     Financial Closures – It establishes final project costs for comparison against budgeted costs as part of Project Implementation Report (PIR). Financial Closure also ensures that, there is a proper disposal of all project implementation related assets including the work-site project closure and Commencement of Commercial Operation (CCO) takes place after financial closure.

4.3     Repayment as per schedule including rehabilitation/ re-schedulement/ rephasement, if required.

4.4     Monitoring by Directors/Management of sponsoring company and lenders.