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Project finance is a specialised financing mechanism employed for large-scale infrastructure and development projects.
It refers to the funding of long-term infrastructure, industrial ventures, and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are repaid from the cash flow generated by the project itself. Project finance typically involves the establishment of a Special Purpose Vehicle (SPV), a legal entity created solely for the execution and management of the project. The SPV serves to isolate project risk from the sponsoring company’s balance sheet.
Project Finance Vs Bonds
While both are used to finance long-term projects, it may be a preferred option to use project finance for the given reasons.
Project Finance
Focus: Project finance is a financing model that is specifically designed for individual projects, typically large-scale infrastructure or development projects.
Structure: It involves creating a separate legal entity, often a Special Purpose Vehicle (SPV), to undertake the project.
Risk Allocation: Risks are allocated among various stakeholders, and the financing structure is closely tied to the project’s cash flow and performance.
Bonds
Focus: Debt securities issued by a company or government to raise capital, not necessarily tied to a specific project.
Structure: Bonds are financial instruments that investors purchase, and the issuing entity (issuer) is obligated to repay the principal and interest.
Risk Allocation: The risks associated with bonds are generally borne by the issuer, and bondholders receive fixed or variable interest payments.
Notable Examples
- Azura-Edo IPP- It is a 459 MW gas-fired power plant located in Edo State, Nigeria. It was financed through debt and equity, following the project finance model. A consortium of international and local financial institutions provided debt financing, and equity was raised from a group of investors. The IFC was one of the key lenders involved in the project.
- Lekki-Epe Expressway and LCC Toll Road Project: The financing involved a combination of debt and equity. The project was structured as a Public-Private Partnership (PPP), with private investors providing the necessary capital to develop and operate the toll road.
Advantages
Risk Allocation: Different stakeholders assume specific risks based on their ability to manage them, reducing the overall project risk.
Off-Balance Sheet Financing: This allows companies to undertake large projects without significantly increasing their leverage.
Long-Term Funding: This provides long-term funding suitable for capital-intensive projects with extended payback periods. This aligns well with the nature of infrastructure and development projects.
Challenges
Financing Costs: Due to the perceived risks associated with large-scale projects, financing costs can be higher compared to traditional financing models.
Complexity: These transactions are often complex, involving multiple parties, intricate legal structures, and extensive due diligence.
Market and Regulatory Risks: Projects are subject to various market and regulatory risks, including changes in commodity prices, political instability, and regulatory changes.
Can MCL Help with Project Finance?
Meristem Capital Limited acts as a Financial Advisor on capital raising transactions such as project finance by advising the Company on the processes in preparing all required documentation, and reviewing the same for accuracy and completeness, helping with financial modeling and cash flow forecast as well as capital raising for the project.
