The global project finance market continues to grow exponentially, providing large businesses with new tools for implementing capital-intensive and high-risk projects in various industries.
Project finance plays an important role, being the main way to provide funds for the construction, expansion and modernization of factories, power plants, roads, seaports, pipelines.
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The essence of project finance
PF is the most complex financing method in terms of organization and planning.
This method is applicable to projects whose value significantly exceeds current assets. The reason is simple: it is extremely difficult for project sponsors to convince a financial institution to borrow more than the entire business is worth.
The terms of the loan in project finance are adjusted in accordance with the expected cash flow, so the terms, interest rates and fees associated with the repayment of the loan are adjusted individually depending on the capabilities of a specific project.
Currently, the capitalization of the banking system of the USA, Great Britain, Spain and other developed European countries allows for the issuance of loans for capital-intensive projects. However, in the case of loans exceeding several hundred million euros, syndicates are often formed, including international ones.
Banks and large banking syndicates are usually the main creditors of projects, providing debt financing in the form of a senior loan or subordinated loan.
According to experts, project finance (PF) uses various financing schemes that have common features.
Project financing of large business projects does not depend on the creditworthiness of shareholders and the estimated value of assets involved in a specific project. This instrument allows for the financing of the implementation of ideas based on the forecast of financial flows, profits and profitability.
In other words, the decisive factors in project financing are the forecast of the effectiveness of a specific project and the assessment of its risks, and not the financial condition of the sponsors.
In a certain sense, this is a violation of the fundamental banking principle, according to which the basis for a bank to provide a large loan may be the reliability (creditworthiness) of the borrower.
The main feature of project financing is the lending of projects without a "summary".
The debt arising from the special project company created by the sponsors to implement a specific project, as a rule, is not reflected on its balance sheet. For sponsors, this means the off-balance sheet nature of the debt, which corresponds to the principle of limited liability of shareholders and is associated with increased creditworthiness.
On the other hand, the existing obligations of the shareholders do not have a direct impact on the debt of the special project company and its current activities.
There is still an indirect connection between the reputation of the participants and the success of the project. Although project financing is based on lending to a company without a long credit history, the creditworthiness of the company's shareholders is taken into account by the potential lender and is reflected in the terms of the loan.
The ability of a new entity to take on debt obligations may be higher in the case of project financing, since a significant share of debt in project financing allows participants to use high financial leverage.
This places certain demands on professional project management and active participation of the lender at all stages of the project life cycle. The lender's activities cover all stages of investment, up to the repayment of the loan with interest. Control over investments requires the creation of an independent company that "isolates" the project from other activities.
The risks, profits and responsibilities of each of the participants in project financing schemes must be clearly separated legally and economically to ensure effective project management at all stages.