Institutional investors are usually risk-averse, preferring projects with an independent credit rating

Institutional investors are usually risk-averse, preferring projects with an independent credit rating

Commercial Loans. Funds lent primarily by commercial banks and other financial institutions, generally securitized by the project’s underlying assets. Lenders seek (1) projected cash flows that can finance debt repayment with a safety margin; (2) enough of an equity stake from sponsors to demonstrate commitment; (3) limited recourse to sponsors in the event of specified problems, such as cost overruns; and (4) covenants to ensure approved usage of funds and management of the projects.

Equity. Long-term capital provided in exchange for shares, representing part ownership of the company. Provided primarily by sponsors and minority investors. Equity holders receive dividends and capital gains (or losses), which are based on net profits. Equity holders take risks (dividends are not paid if the company makes losses), but in return share in profits.

Subordinated Loans. Finance with repayment priority over equity capital, but not over commercial bank loans or other senior debt in the event of default or bankruptcy. Usually provided by sponsors. Subordinated debt contains a schedule for payment of interest and principal but may also allow participation in the up-side potential similar to equity.

Export Credit Agency (ECA) Facility

Suppliers Credit. Long-term loans provided by project equipment suppliers to cover purchase of their equipment by the project company. Particularly important in projects where capital equipment is intensive.

Bonds. Long-term debt securities generally purchased by institutional investors through public markets, although the private placement of bonds is becoming more common. Purchasers require a high level of confidence in the project (for example strong sponsors, contractual arrangements, and country environment); this is still a relatively new market in developing countries.

Internally Generated Cash. In a financial plan, reinvested profits are treated as equity, although they will only be generated if operations are successful.

Loan, guarantee, or insurance facility provided by an ECA. Traditionally, ECAs asked host governments to counterguarantee some project risks, such as expropriation. In the past five years, however, many have begun to provide project debt on a limited-recourse basis.

The security package will include all the contracts and documentation provided by various parties involved in the project to assure lenders that their funds will be used to support the project in the way intended. The package also provides that, if things go wrong, lenders will still have some likelihood of being repaid.

Funds available to a company from cash flow from operations (that is, profit after tax plus noncash charges minus noncash receipts) that are retained and available for reinvestment in a project

This report explores the changing face of project finance in developing markets. 2 IFC and, more recently, other multilateral, bilateral, and export credit institutions have played a strong supportive role in bringing project finance to its current volumes. IFC, in particular, was a pioneer of project finance in developing countries and has a unique depth of experience in this field, which spans more than 40 years in the practical implementation of some 2,000 projects, many of them on a limited-recourse basis. 3 Particularly in today’s marketplace, IFC’s ability to mobilize finance (both loan and equity for its own account and syndicated loans under its B-loan program), the strength of its project appraisal capabilities, and its experience in structuring complex transactions in difficult environments have been reassuring to other participants and important to the successful financing of many projects. The report draws on IFC’s experience in more than 230 greenfield projects costing upward of $30 billion that relied on project finance on a limited-recourse basis (appendix A). It opens with a brief description of the major international trends in project finance over the past two decades and then turns to the essential ingredients of successful project financing.

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