Project Funding – How Differ From Balance Sheet Funding ?
- November 7, 2017
- Posted by: yudhisthar
- Category: Corporate Finance, Discussion Forum, Knowledge Corner
Project Funding – How Differ From Balance Sheet Funding ?
Debt requirements for any specific investment plan are known as Project Funding. Generally, it is required in building any long-term operating assets of the company e.g CapEx Investment in Land, Factory & Building, Plant & Machinery or incidental CapEx funding towards soft capital items like initial set-up cost, interest during construction, pre-operative Expenses etc. or margin on working capital. These assets require a long-term financing requirement in the form of Project Finance.
It calls for Project Funding as the repayment of Debt is highly dependent on the successful rollout. The Project and positive cash flow generation in line with financial plans as projected by the Project Sponsor.
The case of record Funding, the reimbursement of loan is assessed on the idea of the Pre-existing operative assets. It’s current income generation which supplies a far better clarity for satisfactory reimbursement of a loan instead of predicting the long-term in terms of market demand, profit, production cycle etc. as just in case of Project Funding.
In other words, where the Cash Flow is pre-identify and are sufficient to take care of the proposed loan amount. It is an example of Balance Sheet Funding. In contrast, where the Cash Flow generation is dependent on a future stream of revenue expectation.
Project Funding carries a much higher “Risks” associated with it as compared to later. Apart from Financial Risks, the Project is exposing to certain other risks such as Execution Risk. Market Competition Risk, or Risk arising due to change in Government Policies etc. To Address the risk involved in the business, the lenders evaluate the Project and adopts various Risk Mitigation tools by the insistence of sufficient Promoters Margin in the Project, Additional Collateral Security, Escrow of Project Receivables etc.
As against this in case of Balance Sheet Funding, the Financing Lenders find themselves in a comfortable scenario. The Different types of Balance Sheet Funding as in practice are Loan Against Property (LAP), Securitization of Receivables and Corporate Loan etc. etc.
As the risk premium are comparatively less in case of Balance Sheet Funding as compared to Project Loan, the lenders are in a position to offer a more competitive pricing and offer other competitive terms in case of former.
The Project Funding can be classified into the following categories:
Greenfield Project Funding
- Funding for New Project & Product Lines
Brownfield Project Funding
- Funding for expansion lines of existing product & services
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The Project being undertaking by the Promoter in which he does not have any prior experience as a Promoter is know as “Greenfield Project”. On the other hand, the expansion of any existing project with a view to increase its capacity, quality etc. is an example of Brownfield Project expansion.
The Project Loan can be raise in Domestic or Foreign Currency. While there are a large number of Public and Private Sector Banks in India which consider the Project Loan on a case by case basis. There are sector specialist financing institutions like Rural Electrification Corporation (REC), Power Finance Corporation (PFC), Indian Renewable Energy Development Agency (IREDA), IFCI (Industrial Finance Corporation of India), Tourism Finance Corporation of India (TFCIL), Small Industrial Development Bank of India (SIDBI) etc. which also consider the Project Loan proposal as per their specific mandate and on case to case merit.
FCTL and ECB
The examples of Project Finance in case of Foreign Currency exposure are Foreign Currency Term Loan (FCTL) or External Commercial Borrowings (ECBs). Even in case of Domestic Term Loan, the Project Lenders can also allow the Buyers Credit on the import of machinery etc. as a sub-limit to the Domestic Term Loan. The Buyers Credit on the import of Capital Goods can be arranged by Promoters in Foreign Currency. For up to an overall period of 36 months based on the Letter of Comfort issued. The domestic lender in favor of foreign bank extending finance for Buyers Credit.
The case of Infrastructure project which requires a higher portion. Debt Funding in view of the capital-intensive nature of the Project. The Lenders consider the additional funding in the form of Sub-Debt. Mezzanine Fund which carries a higher pricing as compared to Project Loan. The subordinate generally does not exceed 10% of the Project Cost. It is always subordinate to the rights of Senior Lenders. The overall tenor of Sub-Debt is relatively smaller as compared to Senior Lenders.
The Difference between Senior Debt and Sub-ordinate Debt is as under
- Extent of Funding – Limited generally up to 70% of the Project cost
- To be Service on Priority in case of Liquidation / Sale of Charge Security.
- Carries a Nominal Interest Rate on Debt
- Have generally a long tenure maturity
- A Further layer between Senior Debt and Owners Equity and is always subordinate to the right of Senior Lender
- A more riskier instrument to the Lenders and therefore Lenders charges a premium pricing
- Can be extending by Seniro Lender or other specialist institution
- Maturity Period of Subordinate debt is generally around 2-3 years