Project finance

Project financing has certain advantages, and this differs from other forms of financing.

It differs from syndicated lending in that it does not have an impersonal, but an address-targeted nature.

From venture financing - by the fact that it is not accompanied by big risks that always accompany the development and implementation of new technologies and new products. Project finance deals with more or less well-known technologies.

The implementation of such projects is more predictable than the implementation of innovative ones.

But here there are risks that are specific in nature, due to the tasks of project implementation (delay in putting the facility into operation, raising prices for raw materials and materials, exceeding construction estimates, etc.).

The main advantage of project financing is that it allows you to concentrate significant financial resources on solving a specific economic problem, significantly reducing risk due to the significant number of parties to the agreement.

Project financing structures may differ depending on the specifics of project financing, the specifics of the purpose of the project, as well as on the type of agreement (contract), which is the basis for financing. But there are general principles underlying the project finance method:

• Project financing is used to finance a relatively “isolated” project (from the legal and economic side) through a legal entity specializing in the implementation of this project (often a separate, so-called project company is created to obtain and use project financing);

• As a rule, more often, project financing is used for a new project than for an already established business (usually used in debt restructuring);

• The source of the return on invested funds is the profit from the implementation of the investment project (isolated from the financial results of the activities of the project initiators).

• The share of attracted capital in the total amount of project financing is 70-80% (large financial leverage );

• For the loan capital of project financing, investors do not provide collateral or guarantees, or collateral or guarantees do not fully cover the financial risks of the project;

The lenders, when paying interest and debts, rely mainly on the receipt of funds from the project (future profit), and not on the value of the assets and financial indicators of the company.

• The main guarantees for lenders are company contracts, licenses and exclusive rights to use and develop valuable assets, or technology and the production of competitive products.

• The project has a limited life - the term of the contract or license for the types of work or development of assets, the term for commissioning of facilities or structures, the beginning of serial production.

• Financing with full recourse to the borrower:

It is used, as a rule, when financing small, marginal projects. In this case, the borrower assumes all risks associated with the implementation of the project;

• financing without recourse to the borrower:

stipulates that all risks associated with the project are borne by the lender. These projects are the most profitable and attractive for investment, giving competitive products as a result of the project;

• financing with limited recourse to the borrower.

the most common form of financing. All participants share the risks generated by the project, therefore, everyone is interested in the positive results of the project at all stages of its implementation.

Due to the lack of guarantees and collateral for the project to potential lenders and investors, when making a decision (project analysis) about their participation in the project, it is necessary to take into account several more fundamental features of project financing, which require a special approach from analysts:

• the timing of such projects is usually quite long. If in small-scale housing construction projects can still fit in two to three years, then in all other options for project financing we are almost always talking about periods of more than five years, and there is nothing unusual in projects that require loans for a period of more than ten years (although it is necessary recognize that such dates are infrequent);

• in all, without exception, cases of project financing, the investment phase (the stage of the "construction" of the project) is quite complex and its successful completion cannot be guaranteed;

• market research looks more complicated than in cases with less significant investments, since in the process of implementing such projects goods or services are created for which it is difficult to choose analogues and a sales history, and sometimes the appearance of a completed project on the market changes this market so that the previous history becomes not relevant.

For this, investors, creditors need to create a team of specialists to develop this project, which has all the necessary knowledge in the areas of:

• engineering ;
• exploitation;
• legal issues regarding the procedures for acquiring, obtaining permits, developing project contracts, preparing documents required for lending, etc.
• accounting and taxation ;
• financial modeling ;
• financial structuring.

It is very important that this team is well organized: one of the most common mistakes in the implementation of the project is when investors (sponsors) agree with the project company on a transaction that suits them, which is unacceptable from the point of view of project financing.

Due to the fact that the development process of all projects can take from several months to several years, investors should not underestimate the scale of costs. Serious costs are inevitable, since the staff hired by investors to develop the project works on it for a long period of time, possibly spending a lot of time traveling or creating a local office. In addition, it is necessary to take into account the costs associated with attracting external consultants. Development costs can reach 2.5-5% of the project cost, and there is always a risk that the project will be ineffective and all costs will have to be written off. Therefore, the cost control system plays a significant role. (Saving due to the scale of work is also not always possible to achieve - large projects need a more complex structure, so the development cost remains relatively high.)

In the project, which is considered to be implemented on the terms of project financing, at least three participants are involved:

1) design company. It is created specifically for the project, is responsible for its implementation, and usually has no financial history or property for collateral. It is the use of the project company that is the main distinguishing feature of this type of project. Responsibility and risks associated with invested capital are not assigned to a proven and reputable company, but, like financing, are distributed in a complex way between participants in the process and are regulated by a set of contracts and agreements.

2) an investor investing in the equity of a project company. An investor, on the one hand, is rarely limited only to cash deposits and making a profit, and on the other hand, especially when there are several investors, their investments generally may not consist of financial injections. Such investors initiate a project, create a project company and, in one form or another, expect to benefit from its successful activities.

3) creditor . In addition to the fact that the project company receiving the loan has neither collateral nor guarantors in the traditional sense of these terms, the share of borrowed capital in project financing is much higher than in ordinary corporate loans and the average amount provided by the lender is 70-80% of all project capital costs. It is clear that this puts the lender in difficult conditions and requires him not only to find alternative ways to protect his capital, but also to conduct a particularly thorough analysis of all the intricacies of the funded event.

• E.R. Yeskomb. Principles of project finance = Principles of Project Finance. - M .: Alpina Publisher , 2015 .-- 408 p. - ISBN 978-5-9614-1721-0 .