1、MSc (ICM) CV6214 Project Financing Sources of Capital and Risk Management By Assoc Prof Robert Tiong Deputy Director, Centre for Infrastructure Systems, Sch of Civil 2. secured loans.1. Unsecured loans Debt backed by the general credit of the borrower, and is not secured by a perfected security inte
2、rest in any asset or pool of assets. Such an unsecured loan will usually contain a negative pledge of assets to prohibit the liquid and valuable assets of the company being pledged to a third party ahead of the unsecured lenders.2. Secured loans Secured loans are available to most projects where the
3、 assets securing the debt have value as collateral which means that such assets are marketable and/or can readily be converted to cash. The collateral of real property, personal property, payments due under a take-or-pay contract, and assignment of contractual rights are all used as collateral under
4、 project financing.Sources of equity and debt Possible sources for loans and equity for project finance include: 1.International agencies 2.Govt export financing agencies and national interest lenders 3.Host government 4.Commercial banks 5.Institutional lenders 6.Money market funds 7.Commercial fina
5、nce companies 8.Leasing companies 9.Investment management companies 10.Wealthy individual investors 11.Companies which supply a product or raw material 12.Companies requiring the product or service produced by the project 13.Contractors 14.Trade creditorsThese possible sources for loans or equity ca
6、pital can be divided into 2 groups of lenders and sponsors A. Commercial lenders: 1.Banks 2.institutional investors (local markets for equity and bonds): (i) insurance companies and (ii) pension funds 3.Commercial finance companies 4.Leasing companies 5.individuals 6.Investment management companies
7、7.Money market funds.B. Commercial sponsors 1.Companies requiring the product or service 2.Companies supplying a product or raw material to the project 3.International agencies: (i) The World Bank, and (ii) areas development banks 4.Govtexport financing agencies and national interest lenders: (i) ex
8、port-import banks, and (ii) other govt agencies 5.Host government: (i) govt agencies, and (ii) central bank 6.Contractors 7.Trade creditors 8.Vendor financing of equipment1. The World Bank and area development banks Provide debt or a mixture of equity and debt for project financing. A World Bank loa
9、n or an area devept bank loan has certain advantages: 1.The loans tend to be for longer maturity terms than might otherwise be available 2.The interest rates tend to be lower than would otherwise be available. Fixed interest rates may be possible 3.Participation of the World Bank or an area devept b
10、ank endorses the credit for other potential lenders 4.A co-financing arrangement or a complementary financing arrangement may be possible, whereby commercial bank loans are linked with the World Bank or areas devept bank loans, with cross default clauses.The disadvantages of these loans are: A lengt
11、hy approval process which may delay the project for months or years Examples of area devept banks are: Asian Development (ADB), African Development Bank, Commonwealth Development Corporation, Inter- American Development Bank, International Bank for Reconstruction and Development (IBRD) (part of Worl
12、d Bank), European Investment Bank (EIB).2. Govt export financing and national interest lenders Export financing from govt export agencies is generally available from 2 sources, or a combination of both: a. an export-import bank, and b. foreign aidExport financing has the following characteristics: 1
13、. Loans and guarantees Support in the form of loans and guarantees, or in a combination of both. The US Export-Import Bank, e.g. itself provides funding and guarantees. The export-import banks in some countries provide a guarantee of the financing, which is then used to secure a loan from the regula
14、r commercial banking sources of the country 2. Supplier credit In a supplier credit, a loan is made to the supplier, and the supplier quotes financing terms to the purchaser. Supplier credits usually require the supplier to assume some portion of the risk of financing, although as a practical matter
15、 the suppliers profit margin may exceed the risk assumed. 3. Buyer credit In a buyer credit financing, the loan is made to the buyer instead of to the supplier. Buyer will use these funds to purchase capital goods and 4.The quasi-government nature of the loan, which provides some protection against
16、government expropriation or interference in the project9. Disadvantages The disadvantages of export financing are: 1. Delays in procedures to obtain the approval of such loans, 2. The project may not generate the currency needed to repay the loan, thereby creating a currency exposure, 3. The equipme
17、nt available from the countries supplying the credit may not be the best suited for the project, 4.The quality of services performed may not be as satisfactory as those available from other sources9. Disadvantages (contd) 5. Additional equipment or services may be needed, which are not covered by th
18、e export financing, such additional equipment or services may have to be purchased from the same source, 6. The equipment used may require expensive maintenance, parts, repairs and servicing, which as a practical matter will have to be provided by the same supplier. 3. Host governments Host governme
19、nts will sometimes provide the following direct and indirect assistance: 1.Govtequity investment by govt investment companies 2.Investment grants 3.Govt subsidized loans to support new enterprises in depressed areas, 4.Income tax concessions or real estate concessions (while these are not a direct i
20、nfusion of capital, they have the same effect by reducing cash flow needed for operating expenses);3. Host governments (contd) 5. concessions on royalties 6. Subsidized energy costs, transportation, communications 7. Subsidized employee services such as schools, hospitals and health services; and lo
21、cal services, roads, water, sewers and police protection.4. Commercial banks. The largest sources for project loans Tend to limit their commitments to 5 to 10 years with floating interest rates based on Libor or US prime rate. From time to time, loans for longer terms are available. Fixed interest r
22、ate loans for 5 to 10 yr maturities are sometimes available. Loans for large projects typically arranged as syndicated bank loans.5. Institutional lenders Institutional lenders include insurance companies, pension fund, and charitable foundations 6. Money Market funds Money market funds are investme
23、nt funds which concentrate their investments in short-term debt, such as certificates of deposit, short-term notes and commercial paper. They constitute an important source for short-term funds in the US.7. Commercial finance companies Large commercial finance companies are a potential source of fun
24、ds for project financing Compared to banks or insurance companies, finance companies do not have a depositor base or policy-holders as a source of funds. They must buy all their funds in the debt market and relend at a spread. Consequently, funds from finance companies tend to be highly priced 8. Le
25、asing companies Leasing companies, which use tax benefits associated with equipment ownership, offer attractively-priced leases for equipment. Independent leasing companies, and leasing companies owned by banks and finance companies, are an important source of loans and leases Japanese leasing compa
26、nies deserve special attention since they have access to low cost funds and govt funds, which enable them to offer attractive term financing. Japanese leasing companies have been active throughout the world, providing leases which are, in substance, term debt9. Investment management companies Lend m
27、oney as risk capital in circumstances where they can realize an equity participation through warrants, stock rights, conversions or similar rights. 10. Wealthy individual investors An important source of funds in Europe for unregistered debt instruments Eurobonds are attractive investments because t
28、hey are unregistered, are available in small denominations and have tax advantages11. Suppliers of raw materials A supplier seeking a market for a product or a by-product which it produces is sometimes willing to subsidize construction, or guarantee debt of a facility which will use that product. Th
29、is might, e.g. be a canning plant supported by farmers in California, or a steel plant which would use natural gas in the Middle East. The list of possible suppliers varies with each project.12. New product buyers or service users A corporation requiring a product or a service may be willing to prov
30、ide financial help in getting a project built. Generally in the form of a long-term take-and-pay contract, or a through-put contract. Take-or-pay contracts or through-put contracts are the equivalent of guarantees, and can be used to underwrite loans from commercial sources. Another form of financin
31、g which a company needing a product or raw material will sometimes provide is an advance of capital, which is to be repaid from future production. This might be repaid in kind, or by providing production at a bargain price until the advance13. Contractors were rarely able to participate significantl
32、y in the long-term financing of a project, but increasingly involved in such projects Can provide support in the form of fixed price contracts, which are the same as guarantees to build a project facility at a certain price. Contractors will, on occasion, agree to take a portion of their fees as an
33、equity interest in a project. Providing advice on the financing of projects, having had considerable expertise in dealing with lenders, potential sponsors, and various govt agencies which may be sources of funds for projects. They may also be able to suggest structures and methods for project financ
34、ing.14. Trade creditors Trade creditors wishing to do business with a project company will extend short term credit linked to the sale of goods and services. 15. Vendor financing of equipment Many dealers and manufacturers have extensive financing programmes to encourage the sale of their machinery
35、and equipment. Domestic dealers and manufacturers often compete with export financing provided by foreign competitors, and credit terms and criteria may, as a result be somewhat relaxed. This type of financing has been increasingly available in recent yrs, and is an important sources of funds for pr
36、oject financing. Long term warranties of equipment reliability and performance from manufacturers are helpful in arranging financing from other sources. 16. Sponsor loans and advances Direct loans by a sponsor to a project may not be a very satisfactory method of financing a project, since the loan
37、is reflected in the balance sheet, and the subsequent borrowing capability of the sponsor Nevertheless, in some circumstances a direct loan or advance by a sponsor is the only way in which the project can be financed. Such direct loans may also be necessary as a result of cost over-runs or other con
38、tingent liabilities which the sponsor has assumed Joint venture projects are often financed by loans or advances because of the different borrowing capabilities of the joint venturers and the inability of the joint venture to borrow on its own merits.17. Production payments loans and advances Production payment loans and advances are widely used for off-balance sheet and on-balance sheet financing of oil and gas projects, beginning from the North Sea Oil in the 70s, and are beginning to be used for coal and other minerals.
