Monday, 26 february 2018 | Brenda Rodríguez López
Highways, tunnels, airports, hospitals, wind farms, optic fiber networks, satellites, amusement parks, water treatment plants, bridges, universities, oil pipelines,... Many projects have moved forward thanks to a financing alternative called project finance. What does this financing model consist of? Why is this alternative so attractive to promoters? Why are entities interested in investing in high-risk or off-balance-sheet projects like these ones? What do "super projects" need to have to get funding?
Project finance is a funding mechanism used in projects that require a high capital investment. From roads to refineries, there are many large projects that can fit in this type of specialized financing, but mainly they have the goal of building civil works, developing new infrastructures or implementing energy projects.
Project finance is a external financing model which is key so their materialization is possible. These big initiatives need a high financial leverage and a long-term financing model and which is focused on them so they can stay afloat. As these "super projects" have such exorbitant dimensions, they are usually financed through a pool of banks or venture capital funds. The particular characteristics of this financial alternative are not few. They are very interesting and can attract the attention of anyone.
Projects out of balance!
In project finance, the projects themselves are able to generate enough resources to compensate the financing, in fact, it is precisely their estimated future flows which are offered as amortization guarantees. The reimbursement and backing of the financing is not based neither on the physical assets value, nor on the guarantee of the promoter partners, but on the cash flow generated by the project, which as a general rule is not materialized until the first two years of its implementation. Therefore, financing will depend on the project capacity to generate free cash flows, replenish the capital invested and the generated interests.
What makes this model of financing so attractive to its promoters is that it allows the debt contracted to be taken out of its accounting balance. In this way, the impact that this debt may have on the financial costs of the sponsors is minimized. They greatly reduce the risk they assume, they keep their borrowing capacity and can overcome obstacles when undertaking new projects with other loans. Project finance can be established under two types of financing:
- Non-recourses financing: if the project fails, the funders cannot demand the assets from the promoters (only the ones from the funds of the SPV)
- Limited recourses financing: it will depend on contractual commitments and additional guarantees