What Is Project Financing.

What Is Project Financing. Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights, and interests held as secondary collateral. Project finance is especially attractive to the private sector because companies can fund major projects off-balance sheet (OBS). Project finance was first used in 1299 when an Italian merchant bank provided the project financing to finance the development of English silver mines. England repaid the Italian merchant bank who funded the project with the output from the mines. Project financing has been used to finance thousands of projects since those silver mines, including such notable projects as the Panama Canal and North Sea oil platforms. Our Project Finance Learning Center includes information we hope will improve understanding of this type of finance. KEY TAKEAWAYS. * Project finance involves the public funding of infrastructure and other long-term, capital-intensive projects. * This often utilizes a non-recourse or limited recourse financial structure. * A debtor with a non-recourse loan cannot be pursued for any additional payment beyond the seizure of the asset. * Project debt is typically held in a sufficient minority subsidiary not consolidated on the balance sheet of the respective shareholders (i.e., it is an off-balance sheet item). There are three methods in Project Financing: (1) Cost Share Financing or Low interest loan financing. (2) Debts Financing. (3) Equity Financing. Understanding Project Finance. Project finance refers to the funding of long-term projects, such as public infrastructure or services, industrial projects, and others through a specific financial structure. ... The cash flows from the project enable servicing of the debt and repayment of debt and equity. Important. Not all infrastructure investments are funded with project finance. Many companies issue traditional debt or equity in order to undertake such projects. Off-Balance Sheet Projects. Project debt is typically held in a sufficient minority subsidiary not consolidated on the balance sheet of the respective shareholders. This reduces the project’s impact on the cost of the shareholders’ existing debt and debt capacity. The shareholders are free to use their debt capacity for other investments. To some extent, the government may use project financing to keep project debt and liabilities off-balance-sheet so they take up less fiscal space. Fiscal space is the amount of money the government may spend beyond what it is already investing in public services such as health, welfare, and education. The theory is that strong economic growth will bring the government more money through extra tax revenue from more people working and paying more taxes, allowing the government to increase spending on public services. Non-Recourse Financing. Non-recourse finance is a type of commercial lending that entitles the lender to repayment only from the profits of the project the loan is funding and not from any other assets of the borrower. Such loans are generally secured by collateral. ... A mortgage loan is typically a non-recourse loan. Nonrecourse debt or a nonrecourse loan is a secured loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. Recourse vs. Non-Recourse Loans. If two people are looking to purchase large assets, such as a home, and one receives a recourse loan and the other a non-recourse loan, the actions the financial institution can take against each borrower are different. In both cases, the homes may be used as collateral, meaning they can be seized should either borrower default. To recoup costs when the borrowers default, the financial institutions can attempt to sell the homes and use the sale price to pay down the associated debt. If the properties sell for less than the amount owed, the financial institution can pursue only the debtor with the recourse loan. The debtor with the non-recourse loan cannot be pursued for any additional payment beyond the seizure of the asset. Note on Balance Sheets. A balance sheet is a snapshot of a company’s assets, liabilities and equity at a particular point in time. It must always “balance” the assets with the liabilities and equity. For example, for your personal balance sheet, if you borrow $5 from a friend, your liabilities would increase by $5, but the cash in your wallet, an asset, would also increase by $5. This is one of the 3 main types of financial statements (along with the income statement and cash flow statement) that are used to convey the financial health of a company. BECTIC FINANCE COMPANY LIMITED provides international project finance, trade finance and monetization services in more than 100 countries worldwide. Whether you need financing once or many times every month, our financing and advisory expertise are unparalleled, as is our inexorable commitment to your success. BECTIC FINANCE COMPANY LIMITED website : becticfinance.com Email : info@becticfinance.com