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A Deep Dive into Project Financing

Here we answer clients' most common questions and compare different types of lenders and the relative costs involved with each.

Getting to Financeable & Quasi-Project Finance

There is no such thing as a “perfect” project finance structure and parties. However, the more creditworthy the contract parties and the more proven the technology, the better. For example, it will be difficult to finance a project with new, unproven technology. Week feedstock and output contracts can also be an issue. It is possible to finance a project with an experienced but somewhat smaller EPC contractor but bigger is easier. Since a substantial equity contribution is going to be required to capitalize the SPE, it is always helpful if the investor is a “strategic” one—that is, a company with experience at developing and building projects like this and/or the technology provider. The lenders realize that if a company experienced at doing this very type of project is willing to invest, then the lender’s perceived risk is much lower. That gives us a chance to maximize beneficial terms and financing.
In fact, if your EPC contractor is willing to invest, in addition to building your project, and guarantee the debt for a temporary period where commercial operations go according to plan (as they would under an EPC contract), we may be able to structure what we call, a “quasi-project finance” transaction which will likely considerably widen the pool of potential lenders and in doing so, save you substantial amounts of money.

Financeable Project Contracts

The “ideal” project finance features feedstock and offtake contracts with terms at least equal to the term of the financing desired. The EPC contract would be with an experienced company that would either be providing the technology, or “wrapping” the guarantees of the technology provider and other major subcontractors. That means that those entities would provide their guarantees to the EPC contractor who would provide overall guarantees of performance. Failure of the project to produce guaranteed minimum output would result in “liquidated damages” being paid by the EPC contractor which are calculated to, if necessary, pay down debt to a level that is supported by the reduced capacity of the project.
Are there exceptions to those requirements? Yes. For example, if the product produced by the project is, in effect, a commodity and there is an established market for it, sometimes shorter contracts will work. Or, if the core company of the owners of the SPE is providing the feedstock, than the actual terms of the input contract are important but there can be more flexibility.
Mr. Rose has written a summary of typical terms for the major project contracts necessary for a successful project finance. While the summary is necessarily generic in order to be of use for many different types of contracts, clients have found it useful when discussing business terms with prospective project team members such as the feedstock provider, EPC contractor, and the power purchase or other “offtaker agreement. Contact us for a copy.

The Continuum

Below is a chart showing some aspects of various project finance proposals and prospective lenders for each. This is meant to show some general issues and there are exceptions to a lot of “required” aspects. It also doesn’t apply to proposed financings that feature untested technology, total market reliance for most or all feedstock and output, etc. For a free copy, please contact Mr. Rose.
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