Project finance lending

Project finance lending and loans plays a critical role in the development of large scale and innovative projects, being the main way to provide funds for the construction, expansion and modernization of factories, power plants, seaports, roads and pipelines.

The global project finance (PF) market continues to grow exponentially, offering large businesses new tools for implementing capital-intensive and high-risk projects in various industries.

Viola Funding Limited, specializes in lending and project finance services for large businesses.

We are ready to offer clients with loans from 100 million euros and above with a maturity of up to 20 years on the most attractive terms in your sector.

What we offer also includes financial modeling services, bank guarantees, project management, investment management and engineering, industrial engineering, consulting and much more.

Thanks to broad competencies, international business contacts and rich practical experience, our financial team successfully implements projects in most countries of the world. Share your investment plans and learn more about our advantages.

Project finance (PF) uses a wide range of alternative and complementary financing schemes that share common features.

Differences between PF and corporate lending

Project finance lending is based on specific methods of risk analysis and protection of participants’ interests.

Unlike traditional methods of corporate lending, it is initially impossible to adequately assess the future financial results and assets of a company created to implement a specific project.

In the case of corporate lending, we deal mainly with the assessment of the borrowing company, but in the second case (PF), the investment project assessment comes first.

In corporate lending, the bank pays attention to the following:

• The financial health of the borrower, assets and creditworthiness, which means the ability to repay the principal and interest under the loan agreement within the specified time frame.

• Key financial parameters of the investment project, its advantages and risks for the borrower in the context of their impact on creditworthiness.

In project finance lending, the bank evaluates the following aspects:

• An investment project in terms of efficiency, profitability and benefits for its participants.

• The reputation of the project participants in terms of their creditworthiness and professional competencies, their ability to obtain the predicted benefits from the project.

The PF usually does not include borrower checks or only minimally includes them. In this case, the borrower arranges the financing scheme in such a way as to meet the strict requirements of all the parties involved in the project, primarily banks.

The reliability of sponsors, contractors and other business partners associated with investments is carefully evaluated. In both cases of corporate and PF lending, the risk and possible causes of its occurrence are carefully studied, and measures to minimize it are developed.

The terms of the loan affect the profitability of the investment, so the sponsors expect the bank to initially evaluate the project in terms of the correctness of its assumptions.

The essence of project finance and loan lending

Project finance is the most difficult method of financing in terms of organization and planning.

At present, the capitalization of the banking system of the USA, Great Britain, as well as Spain and other developed European countries makes it possible to issue loans for capital-intensive projects.

This method is applicable to projects whose value significantly exceeds the current assets of the initiators. The reason is that it is extremely difficult for project sponsors to convince a financial institution to borrow more than the value of their entire business.

Loan terms in project finance are set according to the expected cash flow, so the maturity, interest and fees associated with the repayment of loans are adjusted individually depending on the specific project and its market.

Large banking consortiums are the main providers of Project finance lending and loans for large projects in the form of subordinated loan.

Project finance (PF) uses a wide range of alternative and complementary financing schemes that share common features.

The concept of project finance for large business projects does not depend on the creditworthiness of shareholders (sponsors) and the value of assets involved in a particular project. This tool allows businesses to finance bold ideas based on forecasting financial flows and profitability. In other words, the decisive factors in project finance lending are the forecasting of the effectiveness of a particular project and the assessment of its risks, but not the financial health of its sponsors.

The distinctive feature of project financing is the possibility of issuing a loan for large projects without regard to the positive financial history of the borrower.

On the other hand, the existing financial obligations of the shareholders do not have a direct impact on the debt of the Special Purpose Vehicle and its current operations.

Development of a loans agreement for Project finance lending

The consent of creditors is expressed in the form of an official document that defines the main terms of the loan (Head of Terms), which contains the following:

1) Loan amount.
2) Loan maturity.
3) Loan interest and bank charges.
4) The procedure for transferring funds.
5) Debt repayment procedure.
6) Loan security (if applicable).

Large loans in project finance mean high risk for capital providers.

Since the issuance of this document, the chances for the implementation of the project will increase many times over, and in the future this financial document becomes the basis for the development of a loan agreement.

Head of Terms in the preparatory period helps to verify the assumptions of the feasibility study and the correct definition of the capital structure of the special project company.

If the loan agreement will be based on international law, it is advisable to hire consultants who specialize in the law of the host country and at the same time have a local office. In the case of capital-intensive projects, when choosing banks for a financial consortium, it is worth choosing a bank that is well acquainted with local legal realities.

A loan agreement in project finance typically includes the following:

1) Conditions for granting financing.

2) Rules for repayment of the main part of the loan and interest payments.

3) Financial conditions that the borrowing company undertakes to comply with.

4) The method and frequency of the borrower’s reporting to the bank.

5) Conditions that allow the bank to terminate agreements and demand immediate repayment of the loan or seizure of assets that were provided as collateral.

6) Certificates, acts and statements that ensure the fulfillment of the contract.