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Success Tips for Obtaining Project Finance
We often get questions about how to qualify for the best terms to finance projects overseas. Impact investors and US government sources offer subsidized or concessionary financing for projects that deliver social and environmental benefits. Here are some of those frequently asked questions:
- What is a “Sponsor” and what are the project ownership rules [for certain US investors]?
- Can the Borrower be an individual or must it be a corporation?
- How can we best describe the project’s Operations & Management Team?
- What types of equity or assets qualify?
- Project Costs/Funding Plan — how to show cash vs. “in kind” contributions of equity?
- What are the acceptable project implementation timeframes?
- What Country Data and Developmental Aspects are most important?
- How do we show Market Feasibility?
- How do we show the financial (business) base case?
Questions 1-5 will help with summarizing a project seeking capital (called “pre-application”), and Questions 3-9 are some of the most frequently asked questions and detailed answers for preparing the complete loan application.
1. What is a “Sponsor” and why might you need one?
Project owners sometimes involve a US “sponsor” to qualify for better interest rates, maximize their rights to profits (when bringing on an equity investor partner), or get the sponsor involved as an equity owner, or other long-term relationships.
Used primarily when seeking capital from US government sources (US OPIC or ExIm Bank), the sponsor or investor needs to be a U.S. citizen or the sponsoring company needs majority U.S. citizen ownership. Citizenship or permanent resident status both qualify. Other US involvement may satisfy this preference, such as when U.S. brand-name franchisers, manufacturers, operators or contractors are significantly involved in the project on a long-term basis.
If the sponsor is a corporate entity, indicate where incorporated, owners’ names and share of ownership.
2. Can the Borrower be an individual or must it be a corporation?
Project loans require that you identify the legal entity that will borrow the funds, with associated legal information disclosed, including ownership structure as well as financial statements. If the entity has not yet been registered as a corporation, give information about where you expect to incorporate and on what date, prospective owners, and their respective ownership shares.
If ownership structure entails a Special Purpose Vehicle (SPVs are common in project finance), provide further information on any equity holders with 5% or more of indirect ownership interest in the project. Provide summary qualifications of major investors, their financial capacity to support their investment in the project, and consider potential credit enhancement/guarantees. Some investors may be better involved as loan guarantors than as a direct source of financing.
3. How can we best describe the project’s Operations & Management Team?
Long-term (senior) debt usually requires a detailed description of operations, management organization and their capabilities (key personnel, their experience), as well as a description of inventory and financial control systems. At that time, you will be able to include a discussion of management decision-making/reporting and financial reporting.
In the summary version of “who is doing this project,” the management team overview might take up just a few paragraphs or a half page at most, with separate résumés or CVs (in PDF format, typically) for each principal available in the data room or as an Appendix to the full business plan. Be sure to include those principals who have at least 3-5 years of successful track record in the relevant industry and/or host country.
4. What types of equity can be used to leverage debt? What types of assets qualify for pledging collateral?
Equity can come from other types of loans (subordinated debt, short-term debt such as construction finance, mezzanine, etc.) or cash capital, foundation or government grants (already committed or received), prior major expenditures (purchase or lease of land, for example; also inventory or equipment) and limited amounts of estimated “in kind” contributions (see below).
To pledge collateral (senior lenders require this, often in addition to a performance guarantee or loan guarantee), focus on real estate, facilities, equipment or other tangible assets. Labor, services, deposits, permits, or other contracts are essential to the business, but usually not considered when making a pledge of collateral. Tangible physical assets will usually be discounted, using 80-90% of their value, to reflect depreciation or adjusted market value, only as a form of security for the lender in the event of loan default.
Assets that can be used for a pledge of collateral are usually capital assets mentioned above as well as buildings, infrastructure, electronics or other hardware, raw land, developed land, raw materials, goods for sale (inventory), or other items recently purchased and/or with a fair market or “book” value. Include both current assets as well as those to-be-procured from loan proceeds. The collateral pledge, after discounts, is typically equal to or greater than the loan amount.
If the existing equity or pledge of collateral are thin, it is often essential for the project sponsor or owners to offer a written loan guarantee that says, in effect, responsibility for servicing the loan shifts to the guarantor in the event of default. Such an agreement would also guarantee the completion of the project, provide coverage against cost overruns prior to completion of the project, or early operating problems, despite careful planning and an allowance for contingencies in the financial plan. This will not only make loan approval easier but in most cases also decreases the annual percentage rate (APR) for the loan.
5. Project Costs/Funding Plan — how to show cash vs. “in kind” contributions of equity?
Summarize the Total Project Costs/Funding Plan (Sources & Uses) in a table with breakdown of major expenditure categories. See the last line of Creating a Sources and Uses Statement, or if applying for a loan from US OPIC, download and use this worksheet (sample table in Sections 6 & 7) for reference. For each category of expenditure, discuss and provide data on bases for estimates, where practical. Discuss sources of cash equity contributions, including cash, prior or new loans, grants, etc., from US or other investors. Generally the expectation is at least 20-25% of the project equity would come from a US sponsor. A US sponsor is defined as either a US citizen or a company that is majority owned/operated by US citizens.
For in-kind (already existing) asset contribution, discuss bases for estimation. Note that valuations acceptable to the lender will be needed, including estimates to support in-kind contributions, during loan application due diligence.
6. What are the acceptable project implementation timeframes?
Most loans originated by In3 reach final maturity (get paid off) in three to twenty years, and can include a suitable grace period — usually up to 24 months — during which only interest is payable. A planning worksheet is available upon request.
Once pre-qualified, work with In3 to describe the implementation timetable, including construction management, if applicable. Together we will use the business plan narrative (outline also available) to document the identity and qualifications of designers, construction contractors and other major parties involved in the project’s implementation, including possible contractual terms with vendors. Provide details on infrastructure that impacts the project (energy, water, communications), and its sources. This may tie in with the project team’s track record and experience; or at least the contractors that will be hired by the management team.
7. What Country Data and Developmental Aspects are most important?
Highlight macroeconomic country/regional indicators that impact the project. Country credit ratings can be “enhanced” through loan guarantees, or if necessary, Political Risk Insurance for the equity investors. Identify particular regulations (if any) that will impact the business of the project. Include in the project summary the project’s developmental aspects for the country in question. Who will benefit? How? Provide some narrative on how this project will help with the development of the country in terms of employment, training and managerial capacity transfer, contribution to fiscal health (alleviation of poverty or subsistence wages), environmental aspects such as climate protection, reduction or elimination of toxins, waste, etc.
a) Market Size and Demand: Provide 2 years of historical data on target market/industry size together with 3 years of projected growth. Give bases of estimation for projections and sources of data. Correlate this with projected estimates of demand for the particular products or services (sources of revenue) of your project.
b) Supply/Competition: Provide 1 year of historical data and 3 years of projected estimates on suppliers (as above, identify sources of data and bases of estimation). Identify who will be your primary competitors, competition for what (e.g., market share), and the project’s competitive advantage in relation to competition.
c) Market Share: Provide estimates, in light of market size/demand and supply data above, on what will be the project’s market share and why you expect to achieve this.
d) Prices: Need data on same time frame as above for the prices project will charge for products/services. Analysis on how compare to competition.
Note: All numbers presented in market analysis and feasibility should directly correlate with assumptions in financial model.
9. How do we show the financial (business) base case?
The project’s financial model is typically developed in collaboration with In3 personnel in order to document and verify sufficient cash flows to service the loan. The financial model should be accompanied by written assumptions with explanations on bases for their estimation. We use a proven, GAAP- and IFRS-compliant format for either startup (“greenfield”) or expansion projects. Worksheets are available.
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