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Non-Recourse "Project Financing"
Project finance is not easy nor is it inexpensive as compared to full recourse, corporate-type structures, but it may be the best way to get a project financed for many companies or developers.
© Mike Archiro
Borrower and Lender Criteria
Specialized “project financing” may be appropriate for developers of energy, composting and other projects whose feedstock is waste organic material including green, forest and food waste. Or, established solid waste companies may wish to use this technique because the total project cost would cause the “leverage” on their core companies to increase to unacceptable levels and/or they wish to partner with another entity to develop the project.
What is “project finance”? Unlike recourse, corporate type financing, for a project finance, the lender does not have an established company to look to for repayment nor a “blanket” security interest in all of the many assets that an established company has. Instead, the project finance lender looks only to the project itself and the “special purpose entity” or “SPE” that the developer/owners will form. While the physical assets are important, to a project finance lender, the even more important assets are the contracts for feedstock input; engineering, procurement and construction (“EPC”). These contracts contain covenants assuring timely and on-budget construction, guarantees of output production; and the “off-take” of the end product for electricity, gas, compost or other useful source of revenue.
In other words, project finance is just a way of shifting the risk from the borrowing entity with no corporate assets other than the project to experienced, deep pocket contract parties. As one can imagine, the interests of the project developers and the lenders are in many respects aligned—strong contracts from strong parties make the project more likely to be successful.
There are three major risks with which a project developer and bank must deal:
Whether the project has enough feedstock guaranteed to create enough of the electricity, gas, compost or other product so that the project’s financial projections may be met. This is generally done by long term contract although shorter term contracts may be acceptable in a few, unique cases.
Whether the engineering, procurement and construction contractor (“EPC”) will build the project on time and on budget and guarantee that it will produce the product in volume and of a quality which can be sold in amounts consistent with the project projections.
Whether the project’s output or “off-take” is guaranteed to be purchased at volumes and at prices that will produce revenues consistent with the project projections. The off-take contracts ideally will also be long term but in some cases with established markets for the product, shorter agreements may be possible.
Project finance is not easy nor is it inexpensive as compared to full recourse, corporate-type structures, but it may be the best way to get a project financed for many companies or developers. For more on project finance, click here.
How We Can Help
We can review your proposed business terms or draft agreements with the various contract parties and help negotiate any changes that will make them more “financeable”. That’s one reason to get us involved early on in your development process.
We would also review your capital cost and profit and loss projections for the project and assist as necessary towards a final version.
The goal is to develop a lender solicitation package that includes all the salient information about your project.
We can find you a bank that can do project financings for virtually any size, but our services can be especially important for borrowings in the $20-100 million range, which are too small for the largest project finance lenders.
If bank financing is not feasible, we can assist in working with an underwriter to place unrated bonds for the project.
We can assist with the use of tax exempt debt which will save considerably on interest costs. For more on tax exempt debt click here.
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