PROJECT FINANCE

Project finance is a means of funding projects that are typically infrastructure-heavy, capital-intensive, or related to public utilities. During its lifetime, these projects are treated as distinct entities from their parent. A project finance venture undertaken is completely an off-balance sheet item for the parent. Therefore, all financing this entity avails must be repaid exclusively out of its own cash flow and subject to its own assets. The assets of the parent cannot encroach for payback of its subordinate’s liabilities even if the venture fails. Popular sectors where project finance finds its applications include real estate, mining, telecommunication, and power to name a few.

SPONSORS

Sponsors are usually the equity share capital holders of the parent company who wish to seek project finance. Two or more entities may also join hands to float an SPV. Instances of this phenomenon occur when two organizations create synergy for one another or are likely to mutually benefit from the underlying SPV. They are the equity providers of the SPV. Before floating an SPV, they must obtain authorization from the shareholders of the parent company via a shareholder’s agreement (SHA).

BANKS/FINANCIAL INSTITUTIONS

It may be a single lender or a consortium of financial institutions. They are the providers of senior debt and hold precedence over debt extended (if any) by the sponsors. The loan is secured strictly against the cash flows and assets of the SPV only. Therefore, sufficient due diligence is performed before the grant of any credit.

SPECIAL PURPOSE VEHICLE (SPV)

It is a separate legal entity floated by the sponsors of the project. The project finance obtained is directed exclusively only towards this SPV. The SPV acts as a corporate veil between the lenders and the parent company preventing seepage of credit and attachment of property between the two parties.

HOST GOVERNMENT

Refers to the government of the home country where the SPV is located. The SPV must be incorporated in accordance with the government’s rules and regulations. It also often acts as a guardian angel in providing various tax concessions, subsidies, and rebates.

OFF TAKERS

Off-takers are bound via an off-take agreement to mandatorily purchase a certain minimum quantity of products from the selling party. An off-take agreement is frequently resorted to in mining, construction, and other industries of mass significance. The vendor (SPV) incurs a huge amount of capital expenditure. An off-take agreement ensures the seller of the existence of a market upon completion.

SUPPLIERS & CONTRACTORS

As in any construction job, suppliers and contractors are necessary for the execution of a contract. They are the key suppliers of raw material. They also perform crucial functions such as design and build (D&B), operations, and maintenance (O&M), etc.