Introduction to the Project Finance: A complete overview

1. Introduction to the Project Finance: A complete overview When a company decides to fund an idea of establishing or extending an industrial project such as manufacturing units, construction, or other infrastructures, Project Finance is the top pursued solution. Due to the capital-intensive nature of such projects, most companies in their nascent stage, find it nearly impossible to fund the project entirely on their own. Project Finance comes to their rescue, offering long-term debt finance that comprises of a restricted or non-recourse financial composition arranged against the forecasted cash flow, materializing from the project, with only the project assets held as collateral. The process of obtaining Project Financerequires the investor to form a ‘Special Purpose Vehicle’. SPV is an economic entity, run to design, build, and manage the financials of that specific project, thereby guaranteeing lenders of its robust financial health. It’s is a time- tested technique of funding large, risky, and developing industrial projects.

2. Key advantages of Project Finance in Industrial Projects: • Risk Distribution: Funding Industrial Projects through Project Finance allows investors to divide the project risks among the SPV stakeholders that are financially able of withstanding the risks. Moreover, since the equity commitment is lower than the estimated project budget, a substantial chunk of the risk is transferred to the creditor. Off-Balance sheet or restricted recourse: Project Financing allows debt finance to be disbursed off-balance sheet. Capital and interest repayment are sourced solely from cash flow generated from the project earnings. Thus, if the borrower defaults repayment, the lender can only claim assets of the responsible SPV, and nothing that is not part of that SPV, even if they fall short in value versus the amount owed. • Superior tax treatment: Once Project Finance is availed; the borrower can enjoy the fruits of superior tax treatment. Hence, this is the most sought- after solution for funding long-term projects Impact of sponsor credit on a project: Not only this financing structure optimizes project leverage, but it also makes sure that the creditworthiness of the sponsor does not have an ill effect on the project. • • Financing an industrial project goes typically through the following 3 stages: Pre-Finance stage: This stage involves realizing the project plan to be pursued basis business needs and market trends followed by a detailed analysis of the risks involved and concluding if the project is technically, politically, economically, and ecologically viable. Financing stage: In this stage, the sponsor as an SPV avails equity and loan from financial bodies and arrives at a mutually documented agreement of the payment terms and the loan amount, which is then injected into the SPV to finance the project. The disbursement takes place with a mix of debt and equity with a ratio

3. generally of 70:30 (may vary from case to case). After Project financing is complete it enters the financial close stage Post-Financing stage: Once the project is fully financed, the project-cycle and its milestones are kept under close watch and pushed for completion ahead of the ascertained deadline. Upon project completion, the loans are paid off through the project earnings. What does the future of Industrial Project Finance look like? India so far has witnessed many successful completions of infrastructural projects through Project Finance such as roadways, airports, power plants, mines, etc. With ample backing from the Indian Government, a rise in the implementation of massive projects especially those associated with urban development can be expected to grow by approximately 75% in 2030. Offshore lending is being liberalized too, to open up more financial sources as against the predominant Indian Banks. A steep increase in the demand for Project Financing can be hence forecasted pointing towards an economic boom. Original Source: https://bit.ly/2DsGbiC