International project financing services of investment and trade transactions is becoming an increasingly important factor in business development.
Since the end of the twentieth century, the world economy has been developing under the influence of globalization, which establishes modern rules for building an interconnected, deeply integrated world. International finance is closely related to the cross-border flows of goods, raw materials, labor, financial resources and information, which initiate radical changes in all national economies.
The implementation of numerous international investment projects around the world is accompanied by the rapid development of markets and an increase in the share of exports in the gross domestic product of developed countries.
In 2018, global exports reached $ 19.45 trillion (an increase of 9.4% over 2011), while global imports increased to $ 19.77 trillion.
The globalization of key sectors with the strengthening of international value chains has become the basis for the global economic growth on the verge of the coronavirus crisis.
The architecture of the world economy has changed significantly in recent years thanks to the liberalization of foreign trade, the development of the international financial market and the fragmentation of international production. Multinational corporations are now becoming the driving force behind economic development, and international project financing has become a common practice for big business.
According to UNCTAD reports, in 2018 the number of multinational corporations in the world exceeded 82 thousand, and their number has increased almost 12 times over the past 30 years and continues to grow.
The top 500 largest multinational corporations currently control half of the world’s industrial production, and their profits often exceed the budgets of developed countries.
International project financing of investment, including advanced project finance tools, takes an increasing share in such industries as energy, chemical industry, mechanical engineering, electronics, oil and gas projects and many others.
CP Finance UK FINANCE LIMITED offers a wide range of advanced instruments for international financing of large projects, including investment loans, project finance (PF), corporatization, financial leasing and much more. The geography of our services covers almost the whole world, including the European Union, the USA, Latin America, Russia and the CIS, North Africa, the Middle East, as well as South Asia, East Asia and China.
Fully realizing the importance of implementing international investment projects for modern business, our financial team is actively working to improve analytical tools and develop new financing models.
We are ready to provide long-term loans for businesses from 50 million euros with a maturity of up to 20 years.
CPUKF also offers a full range of services related to the organization of project finance, including the establishment and management of SPV / SPE.
International project finance instruments
Project finance (PF) brings together large-scale mechanisms for international project financing of investment projects, which are fully based on the ability of the project to generate cash flows to service debt.
International project financing instruments are built on multilateral contracts between stakeholders that jointly ensure projects aims.
Project finance works through SPV / SPE, the sole purpose of which is the implementation of an investment project. A specially created and formally independent company guarantees that the assets will be used for the development of a specific project in accordance with the contracts. During the planning phase, such a project should be subjected to a detailed assessment to ensure financial, legal, environmental and technical viability and return on investment.
The most important aspects of PF are high leverage (on average, projects are financed by 20% by initiators and 80% by borrowed funds), a long implementation period (usually up to 20-30 years), as well as the use of the generated financial flows of the project for servicing debt.
The off-balance nature of project finance (the project’s debt is not reflected in the financial statements of the initiator) facilitates the implementation of ambitious projects by small companies that are unable to provide sufficient collateral to obtain loans. In this case, funds are provided against the future cash flows of the project, regardless of the assets of the initiator.
In most cases, these are projects with mature technologies.
Increased investment in infrastructure and the tendency of governments to reduce their budget deficits have become fundamental factors in the development of project finance around the world.
This funding model allows governments and private companies to jointly complete risky and costly projects, often through public-private partnerships (PPPs).
The most important features of project finance are listed below:
• The project participants create a special project company (SPV / SPE), which acts as a borrower, is responsible for attracting financing and implementing the entire project.
• The initiator of the project usually makes a certain financial contribution to its development (usually about 10-30% of the cost), linking the financing of the project with its management.
• The project company enters into multilateral contracts with key stakeholders, including contractors, suppliers, capital providers, customers and government (if applicable).
• The project company operates with a high debt-to-equity ratio, so creditors have limited claims in the event of bankruptcy.
• Guarantee agreements aim to ensure that the project is profitable enough to meet the requirements of the capital providers as the upfront costs during the construction phase are very high and no cash flows are generated.
• Project finance usually involves the creation of a reserve fund, which is formed from the current cash flow and protects the project from unforeseen circumstances during the life of the project agreements.
Today, project finance is widely used in the energy sector (especially the construction of solar and wind power plants, the development of other renewable energy sources), telecommunications, transportation, infrastructure projects and capital-intensive industries of modern industry.
CPUK Finance Limited specializes in organizing project finance schemes in the EU and beyond.
Our team is ready to attract debt financing for a large project in any country in the world. The geography of our services covers dozens of countries in Europe, North America, Latin America, Africa, the Middle East and East Asia.
We will be happy to advise you on any aspect of international financing for large projects.
Instruments for financing of investment projects
Any company that implements large investment projects must have reliable access to funding sources.
Multinational corporations and companies operating overseas are no exception.
Sources of international project financing for investment projects fall into two broad categories. Equity financing consists in obtaining financing through an increase in capital, that is, the issue of new shares. Debt financing means attracting borrowed funds through banks, financial institutions, investors, etc.
Multinational corporations or companies operating overseas, as opposed to companies operating only in the local or domestic market, tend to have a significant need for resources. In most cases, this need cannot be fully satisfied in the domestic market during the implementation of large capital-intensive projects. For this reason, companies strive to diversify funding sources and raise funds both domestically and internationally. International financing instruments for financing long-term investment projects are briefly discussed in this section.
The use of debt financing for international investment projects, such as the renewal of existing assets and the purchase of foreign companies, is widespread in many areas.
The effective use of debt instruments offers significant benefits to companies operating outside the country of origin.
The cost of debt financing may be lower compared to alternative sources. In addition, the interest paid on the loan is not taxed. Attracting affordable sources of debt financing for business development abroad helps to increase the return on equity.
According to the Alliance for Financial Inclusion (AFI), paying off debt forces managers to be more disciplined, which contributes to the overall efficiency of managing specific business projects.
What to consider when choosing international financing
It is important for participants in an investment project to carefully analyze all financing alternatives, as well as to establish the advantages and disadvantages of each of these options.
A professional project analysis enables companies to make informed decisions, select the best financing possible and therefore helps to maximize the value of the project.
The first factor that needs to be analyzed when deciding whether to finance a project abroad is the choice between domestic financing and international financing. In this sense, the obvious way to hedge the risk of fluctuations in the exchange rate of investments in different countries is to obtain financing in the same currency in which the investment is made. It should be remembered that changes in the exchange rate affect both the liabilities and the assets of the subsidiary.
A certain problem is presented by situations when an investment project is being implemented in emerging markets, where the financial system is underdeveloped and, therefore, access to financing is limited.
This makes the cost of borrowed funds very high, negatively affecting the the project.
In such cases, the company can also turn to structures created by international organizations and governments that offer financial support to launch projects in various countries. Examples of such structures are the European Investment Bank or the World Bank, as well as a number of national structures such as ICEX in Spain.
The second factor that should be taken into account when financing projects internationally is the choice between centralized financing through a parent company or an independent search for financial resources in the country of destination. Centralized financing through the parent company has a number of advantages, including uniformity in the criteria for managing financial risks and raising borrowed funds on more favorable terms.
Also, the broad capabilities of the parent company are a bargaining chip in negotiations with potential capital providers.
Finally, it is important for project initiators to determine the type of financing (equity, debt and combined) that is most suitable for a specific investment project and company. To select the best type of financing, financiers assess the company’s current financial position, capitalization and debt levels. In general, it is recommended that the borrower has a well-balanced financing structure with no more than 50% of the total financing in arrears, which results in a financial cost of less than 3% of turnover and allows the company to maintain sufficient financial autonomy.
An important aspect influencing the choice of sources of international financing is the age of the company.
Typically, companies with less experience are financed with capital investments from partners and investors. On the contrary, it is easier for companies with rich experience and good credit history to access international financial markets and obtain large loans on favorable terms.
Other factors that need to be analyzed in order to select the most appropriate international financing instrument are guarantees. The analysis includes an assessment not only of the type of guarantees requested and their duration, but also of whether they should be provided in the country of origin or in the country of destination. The latter can be critical to ensure the security of the transaction. Finally, another factor to consider is the responsibility of the company and its shareholders.
Some countries also impose limits on the debt of foreign companies, and this fact may determine the choice of the structure of financing investment projects in these countries.
For example, China strictly controls the debt financing of projects with foreign capital, obliging such borrowers to finance a significant part of the cost of projects with capital contributed by partners.
In addition, access to bank lending differs significantly from country to country, and the ability to use intra-group loans for multinational corporations may be limited by law, especially in regulated economies. This underlines the critical importance of high-quality planning and legal support of investment projects from the earliest stage.
Our professional team is ready to provide a full range of legal and financial services for clients planning investment projects anywhere in the world.
Contact us to find out more.
CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
finance@cpuk-financeltd.com