Project Finance - A primer in the Renewable Energy Projects

 Project finance has emerged as a leading way to finance large infrastructure projects that might otherwise be too expensive or speculative to be carried on a corporate balance sheet.

The basic premise of project finance is that lenders loan money for the development of a project solely based on the specific project’s risks and future cash flows. As such, project finance is a method of financing in which the lenders to a project have either no recourse or only limited recourse to the parent company that develops or “sponsors” the project (the “Sponsor”). Non-recourse refers to the lenders’ inability to access the capital or assets of the Sponsor to repay the debt incurred by the special purpose entity that owns the project (the “Project Company”). In cases where project financings are limited recourse as opposed to truly non-recourse, the Sponsor’s capital.

What Underpins Project Finance? 

As a general (if not universal) rule, lenders will not forgo recourse to a project’s Sponsor unless there is a projected revenue stream from the project that can be secured for purposes of ensuring repayment of the loans. In the case of large wind and solar power projects, this revenue is typically generated from a power purchase agreement (“PPA”) with the local utility, under which the project may be able to utilize the creditworthiness of the utility to reduce its borrowing costs. 

While the wind power market has matured significantly in the past five years, leading to the successful project financing of “merchant” projects in the absence of long-term PPAs, Solar Projects are generally not yet able to be project financed in such a manner. In merchant power projects, lenders are able to receive assurance of the project’s ability to repay its debt by focusing on commodity hedging, collateral values, and the income to be produced based on historical and forward-looking power price curves and fully developed markets. While project finance lenders clearly prefer a long-term contract that ensures a relatively consistent and guaranteed revenue stream (including assured margins over the cost of inputs), in the context of some industries, lenders have determined that sufficient revenues to support the project’s debt are of a high enough probability that they will provide debt financing without a long-term off-take agreement. Solar Projects, due to their peak period production, high marginal costs, and lack of demonstrated merchant capabilities, are not at this time viewed as “project financeable” without PPAs that cover all or substantially all of their output. 

When to Project Finance? 

One of the primary benefits of project financing is that the debt is held at the level of the Project Company and not on the corporate books of the Sponsor. When modeling projects and projected income, the internal rate of return of Sponsors and other project-level equity investors can increase dramatically once a project is fully leveraged. Sponsors are frequently able to recover development costs at the closing of the project financing and put their money into other projects. 

Another benefit of project financing is the protection of key Sponsor assets, such as intellectual property, key personnel, and investments in other projects and other assets, in the case of the Project Company’s bankruptcy, debt default, or foreclosure. Moreover, project financing allows for a wide variety of tax structuring opportunities, 

On the other hand, project financing is document-intensive, time-consuming, and expensive to consummate. It is not atypical that administrative and closing costs, when factoring in lenders, consultants, and attorneys fees for all parties, equal several percentage points of the amount of the loan commitment. 

Moreover, project financing imposes significant operating restrictions on each Project Company, including its ability to make equity distributions to the Sponsor prior to the payment of operating expenses, debt service, and a percentage “sweep” of additional cash flow (discussed further in Part IV). The result is that the decision of whether to reinvest cash flow in the project does not rest solely with the Sponsor. Given the pros and cons of project finance, the most relevant initial inquiry for an investor or developer may be when is project financing possible or most appropriate? The following questions should be useful in determining if project financing is a realistic opportunity for any given company:

To qualify for Havelet Finance Limited project financing, the energy property must satisfy several requirements. The property must be constructed or acquired by the taxpayer and the original use of the property must commence with the taxpayer.

Companies that are in the business of developing renewable energy projects confront a host of complex and inter-related commercial and legal issues that must be successfully navigated to ensure a project’s success and realize potential investor returns. Regardless of whether project finance is employed, it is important for Sponsors to assemble a team of professional advisors that can not only assist in executing a debt or equity transaction, but also analyze the various options that may exist in the course of developing projects. The currently tight credit environment, which is characterized by a lack of liquidity in the marketplace and a general risk aversion on the part of lenders, serves only to heighten competition for available debt. 

However, in such an environment, the right combination of business model, project scale, contractual structure, and equity support will still be attractive to project lenders for long-term debt commitments. Determining whether to pursue project financing in the course of developing renewable projects is one of the most fundamental decisions that developers must make. An affirmative decision will dictate the legal and contractual structure of the projects, place certain operational limitations on how the projects operate, and limit the developer’s discretion regarding the use of much of the cash flow from the project. On the other hand, a successful project financing can maximize equity returns through increased project leverage, remove significant liabilities from the Sponsor’s balance sheet, capitalize on tax financing opportunities, and protect key Sponsor assets. In order to take full advantage of project financing opportunities, it is vital that companies invest the time and resources during the initial development stages to obtain the best possible terms and conditions in commercial agreements which serve as the foundation to project financing on successful terms.

Havelet Finance Limited is your best bet in all renewable project financing sector.

Website: http://www.havelet-finance.com/
Email: credit@havelet-finance.com