CHARACTERISTICS OF PROJECT FINANCING

Finance

Allocation of Risks

According to the International Project Finance Association, international project financing transactions are riskier than typical corporate finance transactions. A project financing loan’s clearance is frequently conditional on the allocation of risk in the transaction due to the high level of risk exposure.

It is attempted to match risks and related rewards to the deal parties who are best capable of successfully managing them, performed through the project documents. Examples include EPC contracts, fixed-price, turnkey construction agreements that involve significant penalties for construction delays. These contracts place the construction risk on the contractor rather than on the SPE, the project sponsors, or the lenders. 

Expenses of Financing

In addition to the fact that project financings and financial advisory are often more expensive than traditional corporate financing choices, one of the most common characteristics of project financing is the cost of the financing. Furthermore, project finance frequently necessitates the employment of highly specialised financial structures, which raises costs and reduces liquidity at the project’s expense. The cost of underwriting a project financing is much higher than underwriting any other type of finance.

Because of the difficulties associated with obtaining project finance in Surat loans, the complexity of originating and structuring specialised financing structures, the significant amount of work that goes into underwriting project financings, and the enormity of conceiving and drafting project documents, project financings require significantly more time and effort than other methods of financing. As a result, Project Finance is significantly more expensive than other funding sources.

Pricing for project financings may be considerably higher in some cases, depending on the host country, because prices are driven higher by premiums for emerging market risk and political risks, both increasing. Political risk insurance for emerging markets is frequently included in the total cost of ownership.

A large number of project participants

Another characteristic of project finance in Surat is that they always involve many partners in the project. As a result of the large sums of money that are generally involved in project financings, it is common for project sponsors to need to include equity investors on their list of project stakeholders.

The lead provider or lead arranger of financing for large projects, such as those undertaken by Global Trade Funding, is frequently the project finance provider or lead arranger of financing, thus spreading the work responsibilities and the profit and, most importantly, the risk among several financiers.

Similarly, project loans for massive projects are frequently too large to be provided by a single lender. A lender that believes that a project loan amount would represent a disproportionately large percentage of the lender’s capital is likely to take on the role of a lead lender in a consortium of lenders and defer a portion of the loan to other financial institutions. Financial institutions never want to find themselves in a situation where the collapse of one project or one borrower is substantial enough to cause their failure due to the failure of another.

Project financings and financial advisory include a lengthy list of professional stakeholders, including consultants, suppliers, off-takers, and contractors. It is not uncommon for twenty or more key project participants in addition to the multiple financiers, lenders, and investors involved in the project.