Funding for thermal power plants projects is declining every year, but the use of fossil fuel energy remains a bridge linking the modern economy with an innovative carbon-free model of the future.

The growth of renewable energy sources in recent decades heralds an imminent green transformation of the global energy sector.

Against this background, investment projects in the field of coal energy over the past decade have decreased by almost 5 times, retaining, however, a dominant role only in the PRC and developing countries of Asia.

According to the Sustainable Finance Program (Oxford University), the cost of borrowed funds for the construction of new thermal power plants in the world is growing, while the development of renewable energy projects is rapidly becoming cheaper.

Funding for thermal power plants projects is becoming more expensive, reflecting the potential risks associated with changes in legislation.

Despite gloomy forecasts, the construction of combined cycle thermal power plants, including gas-fired power plants and innovative integrated gasification combined cycle technology, continues to play an important role in the energy strategy of the United States, China, Russia, India and other countries.

Considering the huge reserves of coal, oil and gas, which will be enough for the energy industry for at least half a century, the energy of fossil fuels continues to be used even in the context of the global energy transition.

Under the new conditions, companies planning to implement fossil fuel energy projects should prioritize the choice of a financial model for a thermal power plant project.

The correct choice of funding sources becomes the key to the viability of such projects in the future.

Bank loan, combined project finance instruments or bond issue?

It is critical to choose the right financial model for a thermal power plant project, the success of which depends on the asset value of the initiators, future cash flows, electricity and fuel prices, demand forecast and other factors. A deep understanding of the market will help you find the most adequate funding for your project.

Securing funding for thermal power plants projects on the world market requires practical experience and cannot be successfully carried out without the qualified assistance of financial consultants. Assuming that the thermal power plant project already has a viable financial model, the next step should be to use the services of one or two international banks with sufficient experience in financing energy projects.

CP Finance UK Finance brings together an international team of professionals providing comprehensive services for medium and large businesses.

We offer project finance services, develop advanced financial models and advise clients on any financial, legal and engineering issues.

Are you looking for a reliable partner for your energy project?

We are ready to act as your general contractor, offering the construction of thermal power plants under an EPC contract.

Contact us anytime with your project details.

Choosing a financing model for a thermal power plants project

When structuring project financing, the lender must adapt the construction contract or EPC contract accordingly.

It must be drafted in such a way that the rights of the initiator in relation to the specified contract can be transferred in favor of the creditors.

A professional analysis of the contract as part of the structuring of the financial model for a thermal power plant is crucial mainly due to the following fundamental aspects:

• The lender or investor must have access to any economic benefit that the issuing company receives under the contract. In case of violation of the terms of the contract, these funds can be used to compensate for losses to the party financing the construction of the thermal power plant.

• The proponent of the project has limited financial obligations to the contractor, which are clearly defined by the contract in such a way as to avoid “overestimating” the project. To minimize risk, it is important to enter into contracts on a “one-time payment” basis.

It is clear that the more predictable the project budget is and the more limited the risk of its increase during the construction phase of the facility, the lower the risk for the investor.

The financial model for a thermal power plant project should be designed in such a way that the parties have the maximum interest in the successful completion of this project. It is obvious that the investor sets the following conditions.

First, the funded project must be completed on time and put into operation on schedule.

Secondly, the investor is interested in not having a significant cost overrun during the construction phase.

If the proponent of the project does not guarantee that the aforementioned points are properly provided for in the construction contract, then there is a risk that potential investors will refuse to participate in the project. If the project is financed through the stock markets, the success of the bond placement cannot be guaranteed under these circumstances.

For these reasons, the participation of professional financial consultants is essential for the correct organization of financing for the construction of a thermal power plant and ensuring acceptable conditions for the implementation of the project, whether it is a new or mature project.

Bank lending for the construction of thermal energy

The successful launch and expansion of any business initiative, including the implementation of large energy projects, requires available sources of financial resources.

Bank loans are a very popular source of capital for acquiring assets, financing operating expenses, and fulfilling contractual obligations to suppliers, contractors, customers and other lenders.

Despite the wide range of available funding sources, the issue of financial provision of the project with bank capital comes to the fore. Funding for thermal power plants projects on bank lending compares favorably with its simplicity compared to alternative financial models.

Despite the rapid development of equity markets, banks are much more important sources of financing for the energy sector.

Investment loans in some regions of the world account for more than half of all capital-intensive energy projects implemented.

Investment loans: An investment loan is a long-term loan provided by a bank or other financial institution to finance investment expenses related to running and developing a business, including the construction of large facilities.

This loan is used to finance investment projects related to the modernization, reconstruction or expansion of the company’s fixed assets.

The funds raised are used to purchase a land plot for construction, build new power units or expand existing facilities, purchase generators, boilers, turbines, conveyors and other equipment.

The loan amount is allocated to the borrowing company in accordance with the individual needs of the project. A loan can be obtained once or, for example, in parts adapted to the schedule of the investment project.

Funding for thermal power plants projects and construction cost of the facilities ranging from $ 600 to $ 1,000 per megawatt, the total project cost can reach several hundred million dollars.

This makes the development of a financial model critical to the success of the project.

The condition for obtaining an investment loan for the construction of a thermal power plant is confirmation of the economic efficiency of this project, as well as the issuance of loan collateral or other reliable guarantees, well-prepared technical documentation and financial plans.

To reduce credit risk, banks often require the borrower to participate in the planned investment project.

Depending on the type of project, the contribution ranges from 10% to 20% of the investment value.

This requirement is based on the assumption that a borrower risking equity capital will be more interested in the success of his investment.

Bank financing or bond issue: important considerations

Choosing a financing model for any capital intensive project is often a dilemma.

Bank loan, project finance or bond issue?

There are many financial and legal reasons in the thermal energy sector that are important to assess in each case.

If the analysis of the financial model and funding for the thermal power plant project showed that it is necessary to take a long-term loan (15 or 20 years), then the international capital market may be a more appropriate solution compared to the traditional bank loan.

With rare exceptions (for example, long-term loans from the International Finance Corporation), the syndicated loan market offers shorter maturities than may be required to finance a TPP project.

On the other hand, bond financing tends to have fairly long maturities with easy setup and restructuring.

For this reason, the financing of the thermal power plant project can be carried out through the issue of bonds. Given the complex nature of the issue, companies need the right financial instruments and professional support to successfully place bonds, especially among international investors.

Bank loans in many cases are simpler and more affordable compared to entering the stock markets or organizing project financing.

However, there are several good reasons to finance a TPP project through international bond markets:

• The company needs large investments, but banks and the local stock market do not have sufficient appetite to finance the project.

• Companies, for certain reasons, are not satisfied with the financing conditions offered by local banks, credit institutions or private investors.

• The project initiator seeks to diversify risk by opening up access to international institutional investors from other parts of the world.

• Placing bonds on the international market makes the TPP project more competitive given the high rates on bank loans and the complexity of organizing project financing.

The choice largely depends on the scale of the project, the supply of fuel (natural gas, coal, fuel oil or possibly biomass), guaranteed demand for electricity, and the availability of strong sponsors with extensive experience in the sector.

It is important to understand that it is more difficult for companies from developing countries to take advantage of certain financial instruments, such as placing bonds on the global market.

The flexibility ofD is considered to be an advantage over bond-based financial models due to the broad opportunities for negotiating with the bank on changing debt repayment schedules, as well as restructuring and refinancing loans.

On the one hand, serious energy projects are carefully planned and studied, including a detailed risk assessment.

On the other hand, the construction of thermal power plants in developing countries carries serious risks that may require a revision of the financing conditions at any time.

This is not easy to do in the case of the issuance of project bonds.

The project initiator must also anticipate future legislative changes, which are rapidly moving towards green energy in many countries. Obtaining government guarantees can secure the project and will help to increase its investment attractiveness.

Project bonds: a new word in energy financing

Recently, project bonds have been actively used to finance capital-intensive projects.

This can be explained by a number of advantageous features of this type of securities that distinguish them from traditional corporate bonds. Borrowed funds raised by placing project bonds are paid from the cash flow generated by the project, but not from the issuer’s current income.

This feature makes project bonds a kind of long-term investment in future projects. Today, project bonds have become very attractive to large financial players looking for stable and long-term investment opportunities.

Such securities are readily purchased by pension funds, large investment funds, as well as insurance companies and other institutional investors.

The concept of project bonds is underdeveloped in some regions of the world, but this method is gradually crowding out traditional debt financing, especially in capital-intensive sectors such as energy, infrastructure and the LNG industry.

An innovative financial model of a thermal power plant project based on the placement of project bonds has a number of advantages for the initiator.

However, some aspects continue to cause debate among entrepreneurs.

The first argument against the use of project bonds to finance large objects is the so-called negative carry.

Its essence lies in the fact that the issuing company receives funds immediately, while the costs of building a power plant are spread over a period of several years.

This leads to a situation where the issuer is forced to regularly pay interest on borrowed funds that are not actually used at a given time. To avoid unnecessary costs, companies should use a special mechanism of deferred payments or issue several series of bonds in accordance with the financial needs of the project.

The second argument in favor of debt financing for the TPP project is limited access to stock markets.

Some companies will not be able to effectively place their bonds on the international market, while the local market is underdeveloped and does not meet the needs of the business.

This problem is especially common in young companies. But on the other hand, such companies rarely undertake the implementation of large energy projects. In addition, small companies with limited assets do not have access to bank loans, turning to project finance instruments.

Despite a number of controversial issues, project bonds are widely used for funding for thermal power plants projects and construction of the facilities and other large energy projects.

Since such projects are characterized by very high and stable incomes, which are guaranteed by long-term agreements, investors’ appetite for purchasing project bonds is high today.

Project finance (PF) for thermal power plants

The term “project finance” means funding a thermal power plants from internal financial resources and (or) borrowed funds provided against future cash flows, but not against the assets of the company that initiated the project.

Thus, the potential return on investment and risks largely depend on an accurate and reasonable assessment of a particular project by the investor.

Project finance (PF) is widely used in the energy sector due to the attraction of large investments on an off-balance sheet basis.

Thanks to the competent implementation of this financial model for the TPP project, companies can simultaneously build several large facilities without burdening their financial statements with a huge debt.

In most cases, partners create a dedicated project company, whose assets serve as collateral and its future cash flows are used to service debt.

Banks in this case provide about 70-80% of the project cost, but some financial institutions offer to finance 90% of the project and even the full cost.

The complex structure of the contractual relationship in the framework of project finance contributes to the optimal distribution of project risks between the parties who can best cope with these risks. Consequently, the organization of the PF, along with a detailed analysis of the project, requires multi-stage negotiations and time-consuming legal work.

Regardless of the project type and funding method, partners will make a decision to participate based on implementation risks and expected income.

The financing structure, collateral and other points depend on the specific case.

The cost of arranging project finance (fixed costs) is considered to be higher than traditional debt finance models of a thermal power plant project. In this regard, the PF can be used only for the implementation of large investment projects, estimated at tens of millions of euros.

Most often, project finance is used for the construction of large-scale facilities that require expensive R&D, engineering, as well as technically complex construction and the purchase of expensive equipment.

Until recently, project finance was considered quite risky, but in the mid-2000s, a number of economic studies appeared that confirm the significant advantages of PF instruments over traditional corporate lending in a number of investment projects.

This financing method has been used for the construction of numerous thermal power plants, substations and power lines in the United States, Latin America, Africa, Europe, as well as in East Asia, the Middle East and other regions of the world.

CP Finance UK Finance is ready to offer long-term bank funding for thermal power plants projects on attractive terms.

We also arrange project finance for the construction of thermal power plants around the world, providing a full range of financial, legal and engineering services for energy companies.

Advantages of project finance

Project finance is chosen by energy companies due to several principal advantages, listed below:

• Non-recourse or limited recourse financing.
• Off-balance sheet financing of the project.
• High share of borrowed funds in the project, reaching 90%.
• Absence of strict restrictions in the contract.
• Isolated financing, where SPV acts as a borrower.
• Potential tax benefits.
• Minimization of risks.

To better understand the advantages of project funding of thermal power plants, below we describe in more detail about each of these aspects.

Any combination of the above aspects is sufficient for sponsors to consider the project finance method as optimal for project implementation.

But the most important benefits of the PF for the initiator include limited recourse and off-balance sheet financing through the creation of an independent project company.

If you are interested in project finance for thermal power plants, contact the CP Finance UK Finance financial team. Together with our European partners, we have implemented numerous energy projects in more than 30 countries around the world, so we are ready to use our experience and business contacts to promote your business.

Our services in financing the construction of thermal power plants

CP Finance UK Finance, an international financial company, has served private companies and government customers for over a quarter of a century.

We provide loans, project financing in the energy sector, provide loan guarantees, as well as offer investment engineering services, financial model development and consulting.

The geography of CP Finance UK Finance services covers almost the whole world: USA, China, Mexico, France, Germany, Spain, UAE, Argentina, Brazil, Venezuela, South Africa and other countries. Extensive international experience and deep understanding of the energy sector guarantee the high performance of our solutions.

Our team with partners carries out engineering design, construction and modernization of coal and gas thermal power plants of various types.

CP Finance UK Finance offers advanced integrated solutions for industrial customers.

If you are looking for a reliable financial partner or general contractor, please contact us.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
Alt-Email:admin@cpukfinanceltd.com

One of the preferred options for financing a businesses and capital intensive projects is the so-called syndicated loan.

Companies often face the challenge of finding funds to finance large projects, especially when it comes to multi-billion dollar infrastructure, industrial or energy projects with a long construction period.

At the planning stage, our clients must decide whether to use equity capital, finance a project with the help of business partners, shareholders, investors, or use loans from banks and other financial institutions.

Do you know how to use this financial instrument?

If you are planning to implement a large investment project, contact CP Finance UK FINANCE for advice.

Our team has extensive experience in financial modeling and project financing.

With the support of our high net worth angel investors and financial institutions, we can help you finance the construction of a solar power plant, wind farms, waste recycling plant or other capital-intensive facility on the most favorable terms.

Syndicated loan and other types of external financing

According to the World Bank, financing large projects is a major challenge for fast growing economies.

Today a business can choose the following sources of project financing:

• Leasing.
• Factoring.
• Issue of shares and bonds.
• Bank loans, etc.

Syndicated loan and external financing instruments have different purposes and usually mean different costs for the companies that use them.

All of the above sources of project financing can be used in various combinations, based on the characteristics of a particular business.

Despite the existing possibilities of obtaining funding from various sources, loans should be the basis of external financing for projects, and other sources should be considered as complementary.

Any major project requires a significant flow of funds, which must flow on a clear schedule to ensure the continuous operation of numerous contractors and subcontractors, manufacturers and equipment suppliers. Depending on the schedule, companies can use different sources of funds at certain stages of construction or operation of the facility.

A bank loan is a common form of external financing for large projects.

Due to the variety of forms of lending, this tool can be easily adapted to the individual needs of a particular company. It is also one of the cheapest sources of capital.

Thanks to close cooperation with high net worth angel investors and some other European countries, CP Finance UK Finance can assist clients in obtaining a long-term syndicated loan on attractive terms.

A syndicated loan is a long-term loan usually used to finance a specific project.

The main features of syndicated financing are listed below:

• Long term maturity: usually several years, but there are known examples with maturities up to several decades, especially in the oil and gas sector, energy and environmental projects.

• The loan is intended to finance specific activities, including the construction of a new thermal power plant or laying of a gas pipeline.

• The funds are partially provided in the form of a revolving loan up to a certain limit established by the agreement.

A syndicated loan is a highly customized financial instrument, which means there are no strict rules.

Loan agreements are very flexible and take into account the specifics of each company, its financial health and market position.

One of the features of a syndicated loan is its wide application in project financing. In these cases, the loan amount often exceeds the value of the assets of the entire enterprise, therefore banking institutions tend to apply very restrictive loan agreements.

Obtaining a long-term syndicated loan exceeding the value of the company’s assets within the framework of project financing is possible if several conditions are met:

• The industry in which the borrower operates is very stable and shows good development prospects (for example, the renewable energy sector).

• The borrower receives guarantees from partners or the contract includes other conditions for recapitalizing the company in the event of certain events.

• The syndicated loan is secured not only by all the assets of the given company, but also by the future cash flows of the project.

In addition, banks usually reserve the right to unblock subsequent loan tranches only when certain events occur.

For example, the allocation of the next part of funds becomes possible after the completion of a certain stage of construction.

Such agreements are usually concluded for significant amounts of financing, incomparably larger than in the case of traditional loans received from one bank. This is explained by the concentration ratios established by law per organization and the internal policy of banks regarding financing a specific sector.

In the case of a large loan, one bank may not be able to provide sufficient funds to implement the project on its own.

The first reason is that the bank runs the risk of violating the legislation, which in some countries imposes strict limits on the concentration of funds for one legal entity or even a sector.

On the other hand, each bank develops its own procedures (some of them even more stringent than national laws) that govern how much funds can be allocated to a particular enterprise or sector. For the combination of these reasons, banks are showing a willingness to organize syndicates in large projects.

An exception to the rule is financing provided in recent years by some Chinese banks, for which it is generally considered unusual to finance large investments by a single institution. Examples of this approach are financing telecom projects in Europe and financing large mining sector projects in Africa and South America. However, these decisions are often made in a centrally controlled economy and are usually aimed at bringing certain products to this market (usually projects are associated with Chinese manufacturers).

In the European context, the amounts of syndicated loans range from several tens of millions to several billion euros.

The largest syndicated loans in the EU are usually issued in the energy and infrastructure sectors, where the loan amount can exceed 1 billion euros.

Such large amounts require special conditions for the distribution of funds and control over their subsequent use. These conditions are determined long before the conclusion of the loan agreement itself and require special preparatory measures.

The role of a financial advisor in obtaining a syndicated loan

High-quality preparation and organization of project financing is the first and most significant step in this process.

Company managers need to understand that preparation determines the subsequent success of the entire operation, and the better your company is adapted to the demands of the financial markets, the sooner and on better terms the process will be completed.

When your company first enters the syndicated finance markets with a major project, it is advisable to hire a financial advisor from the start. Such advisory functions are performed by renowned European and American banks such as Merryll Lynch, Goldman Sachs, JP Morgan, Citibank, Deutsche Bank, RBS, West LB and many other world famous brands.

In addition, you can hire a financial advisor from companies that are professionally engaged in such activities, such as Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers, TDI Corporate Finance, etc. Of course, the cost of such services from market leaders can be very high.

CP Finance UK FINANCE is ready to provide businesses with a full range of advisory services, including financial modeling, selection of optimal funding sources and assistance in obtaining a syndicated loan on favorable terms.

The financial advisor is usually selected through a competition announced by the company.

His role is to guide the company through the entire financing process in an optimal way. However, this is often limited to optimization of the financing structure without legal advice.

The consultant’s fee depends on the loan amount. For the largest loans of about 1 billion euros, this fee can amount to hundreds of thousands of euros. The advisor’s excellent knowledge of the financial market (both domestic and international) will be an advantage for the borrowing company.

The role of a financial advisor in obtaining a syndicated loan:

• Conducting a detailed analysis of the financial market. Choosing the most appropriate moment to enter the market to obtain a loan on the best terms.

• Selection of alternative sources of financing for the project, which will supplement or replace the syndicated loan. Determination of the most suitable banks or financial institutions to manage funds. Providing a list of institutions interested in the project.

• Professional assistance in drawing up a business plan at the request of the bank. Execution of official documentation and negotiations with interested parties.

Only companies that have experience in syndicated financing or are part of an international group using such financing can enter the market without the assistance of a financial advisor.

Stages of obtaining a syndicated funding for a large project

Preparing documents and arranging syndicated financing usually takes more time than applying for a loan from one bank.

A simple contract with standard market terms can take up to 3 months to prepare, while more complex options can take 6 months or more.

At this stage, a professional financial consultant helps to clearly divide the organizational process into several stages with deadlines for their implementation.

In general, the stages of obtaining a syndicated loan include:

• Hiring a financial advisor (optional).

• Selection of proposals, selection of the organizing bank for the consortium and signing of a mandate letter (a document authorizing this bank to organize a syndicate on agreed terms). In some cases, it is possible to sign an underwriting letter, a document guaranteeing a company to organize financing on agreed terms.

• Drawing up a project financing schedule, taking into account the specifics of a particular business, technical and other possibilities for the implementation of a particular project.

• Prepare a term sheet, a document that contains a funding request detailing the financial needs of the borrower.

• Preparation and signing of an information memorandum.

• A syndication process for arranging financing on specified terms.

• Selection and signing of an agreement with a law firm.

• Development of a loan agreement and approval of collateral.

• Obtaining the necessary official and legal approvals.

• Signing the agreement.

Below we describe the most important stages of syndicated financing.

Syndicated loan standard terms and conditions

Financing large projects through a syndicated loan requires the borrowing company to strictly comply with numerous requirements throughout the term of the agreement.

This includes informational, financial, legal or other obligations stipulated by the relevant contract.

Particular attention should be paid to the events of default prescribed in the agreement, which can jeopardize the position of the lender or borrower. In general, in the case of obtaining a syndicated loan, the borrower has to provide a little more information than a regular loan.

Disclosure obligations are limited to standard reports such as quarterly and annual reports, often requiring audits. You may need to provide much more detailed reports. The amount of this information is usually agreed upon at the stage of signing the contract. In addition, the company provides its budget and long-term business plan.

In addition to standard reporting on project finance, banks may require permission to change a company’s business profile, an obligation to apply for consent (waiver) in the event of a merger with another legal entity, the creation of subsidiaries, and many others.

Bank requirements depend on many factors, including the following:

• The size and position of the company in the market.
• The amount of the syndicated loan and its maturity.
• History of cooperation with agent bank.

The agent bank is the financial institution through which the company contacts the rest of the syndicate.

Thus, the bank acts as a coordinator between the borrower and the funding banks.

The agent charges a commission for this service. This commission is also negotiated before signing the loan agreement and usually does not exceed 100 thousand euros per year, which is quite a sufficient amount for a large syndicate.

Further responsibilities of the borrowing company should include maintaining certain financial ratios within specified limits.

The most common indicators in loan agreements include:

• Debt / EBITDA ratio. The lower the number, the better. The level considered safe is between 0 and 1, and the indicator above 2.5 is usually considered dangerous for the company. However, this scheme should not be considered final, because, as is the case with many other financial indicators, a lot depends on the industry.

• EBITDA / debt service. This figure should be high. An indicator below 1.5 is considered dangerous, and at a lower level, companies have problems servicing their current debt.

• Debt / equity. The lower the number, the better. It is used at the initial stage of implementation of large projects, when the company has not yet generated positive EBITDA. An indicator level above 2 is considered dangerous.

The syndicated loan provides stable financing at relatively low costs. Preparation in this case is extremely important, since the subsequent success of the entire operation often depends on professional planning and competent paperwork.

When using syndicated financing, companies should maintain certain ratios within specified limits. These actions are in the best interests of the business as it will minimize subsequent costs.

If you are looking for funding sources for a large project, contact CP Finance UK Finance at any time.

We are ready to share our experience and assist in obtaining loans from leading European banks and financial institutions.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
Alt-Email:admin@cpukfinanceltd.com

Over the past few decades, developed countries have used a new method of financing of real estate projects and risky development projects 

This method is called project finance (PF).

This concept is usually characterized as leveraged financing of a project with limited recourse by raising funds through a specially created independent company.

Thus, project finance differs from traditional construction finance in at least two ways.

First, lenders share some of the business risks with the project company.

Secondly, the project finance is provided against the future cash flow generated by the project.

A very important feature of the projects implemented in this way is the sharing the risk between the participants. Each PF initiative is assessed by the participants mainly in accordance with its ability to generate cash flows, which become the main guarantee of debt repayment and return on equity.

Project finance is a flexible combination of financial products / services that makes it possible to finance projects in the field of residential or commercial construction against a guarantee of expected future cash flows.

In order to obtain a safe environment for invested funds, the generated cash flows must be isolated from any other property of the participants.

This is achieved through the establishment of a special purpose vehicle (SPV / SPE). Thanks to a formally independent company, in the event of a project failure, creditors can only seek to satisfy their claims within the assets of the project company. Accordingly, the initiators risk only those funds that were invested in this company.

Conversely, in the event of shareholder insolvency, the SPV / SPE will continue to operate under all circumstances.

This guarantees the completion of the development project regardless of the financial health of the initiating companies.

Undoubtedly, investing in large construction project financing requires large financial costs.

It may seem that experienced developers should have no problem with this.

However, in the face of a lack of funds, many companies are abandoning promising projects. To maintain financial liquidity and business activity, developers should consider applying for an investment loan.

In general, there are many options for financing construction projects. Most often, self-financing, attraction of external funds, or various combinations of external and internal sources are used.

• Self-financing of construction: net income, depreciation, sale of assets, tax savings as a result of investment incentives.

• Debt financing (for example, construction loans, non-bank loans, leasing, bonds), as well as issuing securities (issuing shares and raising venture capital).

When a unique investment opportunity appears on the market, and the company’s budget does not have sufficient financial resources to prepare an attractive proposal, it is worth turning to solutions such as investment loans and project finance.

More and more large companies in the construction industry decide to use investment loans for their projects. Today, developers are attracted primarily by speed, flexibility and a minimum of formalities. These advantages, combined with customized financing schemes, guarantee the success of the project. There are about 60 different financing methods described in the literature, which differ in many criteria and can be used for different projects.

The main dilemma for each developer at the stage of preparing an investment project is the choice of the most suitable organizational structure, which, in turn, determines the choice of the source of financing.

The role of project finance in the construction industry

To take full advantage of modern tools for financing construction projects, it is often necessary to create an independent business entity.

Its task will be to implement a specific investment project.

In addition to traditional and well-known forms of construction finance (loans, bonds, leasing), other less popular instruments such as project finance can also be used. They represent the financing of capital intensive projects through an independent entity.

A construction project can be carried out within an existing company that has worked with other construction projects, or it can be carried out by a so-called special purpose vehicle (SPV).

In the case of implementation of development projects, SPV shareholders usually act as sponsors. A sponsor is defined as an entity that provides an incentive to start implementing an investment project. Typically, a development company creates a special purpose vehicle, bringing in its technology, industry experience and other resources (for example, a land plot).

The long list of potential providers of capital for SPVs includes state and commercial banks, private lenders and other investors buying bonds issued by the project company.

Project finance is based on the assumption that the project itself and the assets obtained as a result of its implementation will be the main, and often the only, source of debt repayment and collateral.

The traditional method of analyzing the operating history and assessing the creditworthiness of the borrowing company is not used, since the SPV is a new legal entity that is created to implement a development project. In this case, the credit risk analysis relates to the investment project and not to the borrower.

There are two main approaches to financing construction projects, the non-recourse method and the limited recourse method.

A typical situation for a PF assumes the absence of any form of recourse to the borrower.

Due to the limited capacity of provision, capital providers are usually interested in joint project management, which allows them to monitor the work on an ongoing basis and minimize the risk of events that could negatively affect the project.

Large construction project financing using a non-recourse financing is a scheme whereby borrowers do not provide collateral.

The debt is fully repaid from the future cash flows of the project, and possible claims of creditors cannot be transferred to other activities of the initiator.

Most often this refers to investments in strategic infrastructure implemented on the basis of multilateral agreements on public-private partnerships (PPP).

Regardless of the field of activity, project finance today plays an important role in the implementation of large construction projects around the world.

At CP Finance UK, we are ready to provide clients with a full range of services, including financial modeling, legal advice, assistance in registering an SPV, raising funds on the most favorable terms, tax optimization, etc.

Alternative sources of funding large construction projects

Another way to raise funds for the implementation of construction projects is to issue corporate bonds of development companies.

Interest in this tool is growing every year, especially after the financial crisis. The attractiveness of bonds is due to their flexibility and efficiency in the use of funds. The developer’s collateral capital can be freely used for several years and even transferred between several projects, which is impossible in the case of a bank investment loan.

The funds received from the sale of bonds are used only to finance a specific project, be it a new project or refinancing of already started projects.

The funds raised from a developer’s bonds are an ideal example of bridge financing. They can be a valuable addition to loans. It should be noted that the success of bond financing directly depends on the credibility of the developer. Therefore, this method of financing is chosen by well-known companies that have achieved numerous successes and collaborate with recognizable brands.

Developers facing difficulties in obtaining an investment loan or unwilling to use traditional forms of project finance are increasingly choosing to finance new projects through alternative sources.

Growing requirements of banks and unfavorable conditions for granting loans are pushing entrepreneurs to search for them. In particular, many European firms are discouraged by the current parameters for LTV (loan amount versus collateral value) and LTC (loan amount versus total investment cost).

Supporting developers with non-bank private investments is becoming increasingly important.

Attracting private capital to large construction projects is a modern investment strategy that, although more expensive than a bank loan, allows you to finance complex and risky projects faster.

All negotiations take place directly with the investor, which contributes to the flexibility of the contractual relationship and reduces the time for making a decision.

Public financing of construction projects has great investment potential.

The so-called crowdfunding as a social investment tool is gaining supporters both among developers looking for an alternative source of funding and among investors.

Both sides of the project find each other through dedicated online real estate crowdfunding platforms. Each investor receives a share of the rental income of the property built, proportional to his invested capital, or the developer undertakes to repurchase the shares within a specified period.

Bank lending continues to be the most popular form of funding a large for construction project financing around the world.

But the economic downturn caused by the COVID-19 pandemic shows how problematic and risky it is for developers to rely on one tool to finance their operations.

The current difficulties in obtaining an investment loan have long prompted many investors to look for alternative sources of financing and their diversification.

The basis for the success of a construction project

Investment financing play an important role in economy of a nation and any business.

They are a key factor in carrying out business activities, improving product quality, reducing costs and ensuring the competitiveness of a modern enterprise.

Investment financing at the global level can influence the gross domestic product of entire countries, reduce unemployment and ensure macroeconomic equilibrium.

Finally, economic growth is achieved by investing in specific activities.

Investments in promising new facilities such as solar power plants, wind farms or waste processing plants provide the investor with substantial income and capital gains over the long term.

A feature of any investment is its return to the investor in an increased amount.

At the same time, the potential return on investment should correspond to the risk of a particular project.

The success of an investment depends on many factors: the economic situation, the efficiency of markets, access to capital, knowledge and skills for investing, and much more.

All other things being equal, knowledge and skills are crucial for finding successful investment ideas, developing them, evaluating and comparing investment alternatives.

Investment financing and project management is a serious challenge for companies that are implementing large projects these days. Sources of low-cost funds are essential for ensuring the efficiency and quality of projects in such economic sectors as renewable energy, infrastructure, environmental protection, industry and agriculture.

CP Finance UK offers investment financing and large investment loans around the world.

We provide a wide range of services, including financial modeling, obtaining loans from the largest European banks on favorable terms, guaranteeing financing, etc.

The project financing schemes we develop allow companies to implement large projects with a minimum contribution of the initiator (up to 10%).

Contact us to find out more.

Principles and options of Investment project financing

The most commonly used investment financing options are bank loans and loans from international financial institutions, syndicated loans, bonds, hybrid securities and others. Partners can be banks, corporate and private investors, international financial institutions and others. Grants from European foundations and international programs are also an important source of long-term financing for projects in the European Union.

The nature of the project and the conditions for its implementation determine the choice of instruments and sources of financing for the investment project.

External funding sources can be private or public partners.

The state usually provides funds for the implementation of socially significant projects from the national and local budgets.

Factors influencing the choice of Investment project financing options

• Benefits for the funder. Lending involves the payment of interest. If investors finance a specific project, they expect a certain return.

• The right time for financing in the context of the life cycle of the company and the specific investment project.

• The technical level of the companies participating in the project.

• Risks. It is important from the very beginning of a project to clearly assign responsibility for its success or failure.

• Financing as a package of services. The provision of comprehensive services related to the allocation of money, construction, equipment supply and operation of a new facility can be carried out by one large company.

Investment financing is based on several basic principles, including the principle of division of competences, equality of participants, additional financing, the principle of reasonable concentration of funds, and some others. We propose to consider the listed principles in more details.

There are also various classifications of sources of financing for investment projects.

Depending on the origin, funds are internal and external (the latter received from banks, investment funds or other partners).

Based on the organizational structure, all sources of funding can be divided into centralized and decentralized. In most cases, large energy and infrastructure projects are funded from a variety of sources.

Sources of funding for investment business

External financing instruments for investment projects are widely used at different stages of development.

In a broad sense, they are divided into several large groups:

• Debt financing.
• Equity financing.
• Public funding.

Debt financing is a flexible and rather attractive way of providing the necessary financial resources for the implementation of projects.

Debt financing is allocated from resources collected in financial markets, such as bank loans, syndicated loans or bond issues.

Examples of major global financial institutions that finance investment projects include JPMorgan Chase, Goldman Sachs and Deutsche Bank. Our company works closely with reputable banks in Spain and other EU countries to provide you with the best investment financing options for each project.

Lending for investment projects is based on several principles, such as profitability, maturity, solvency, security and target nature of the loan.

Loan documentation includes an agreement that establishes the basic conditions (cost of the loan, loan term, ways of using money, repayment, guarantees, measures in case of unfair fulfillment of obligations by the parties, and so on).

There are different classifications of loans and their application varies from case to case. Depending on the scale of investment projects, we distinguish between short-term and long-term loans. Short-term loans are used to cover recurrent costs during project approval, to raise funds to finance the entire cost of a project or to implement specific stages of a project.

For long-term loans, usually provided by international financial institutions, they are most often provided to governments or against government guarantees.

Syndicated bank lending is practiced due to the high cost of some projects. Depending on the nature of the project, loans can be provided without collateral or with limited collateral.

Usually the obligations of the parties depend on the stage of the investment project. During the construction phase, when costs are highest and the project is not yet generating cash flows, the risk for lenders is high. This usually requires guarantees of fulfillment of obligations, including those provided by third parties. In some cases, during the operational phase, when income is generated, guarantees may be optional.

Bonds are a typical investment financing instrument.

Bonds are long-term securities issued by the government, local authorities, banks, financial institutions and companies. Bonds can be seen as a form of long term loans.

Bonds can be issued at a fixed or floating interest rate, which is charged on the par value of the bond. For each bond, there is a risk of non-payment due to the inability to receive the interest and principal amount. The main parameters that determine the adequacy of financing through bonded loans are the scale and useful life of the project, the cost of financing and the repayment profile. These parameters need to be compared with those of bank lending to determine which investment financing option is best suited for a particular project.

Bond loans are an alternative source of funding for investment projects.

It is most relevant for large multi-billion dollar projects for which the banking sector does not offer sufficient liquidity.

A number of energy, environmental and infrastructure projects are funded through bond issues, and timely interest and principal payments are usually guaranteed by insurance companies. The main role of the latter is to provide credit guarantees to bondholders. As a result of the provision of a guarantee, bonds receive a high credit rating, which reduces the cost of borrowed funds for business.

An attractive feature of the bond market is the wide availability of long-term financing.

This not only makes the implementation of projects cheaper compared to bank financing, but also makes it possible to extend the maturity of the project debt, which, in turn, significantly improves the economic performance of the project.

On the other hand, bond financing also has several disadvantages. Bondholders have certain powers, although they may not touch upon such issues as significant changes in the project schedule, documentation, etc. The entire amount is provided to the investor only upon approval of the project contract and accompanying documentation. In some cases, the last condition does not satisfy the recipient.

Regardless of the financial instruments used, debt financing of investment projects has a number of advantages.

It makes it possible to quickly launch large projects with strong financial plans and shift some of the debt burden to future users of the product or service.

It is also necessary to take into account the disadvantages of debt financing of investments. One of them is a long period of interest payments, which can be up to 15 years or more. The ability of business to react flexibly to changes in economic conditions, political priorities, income levels and other factors is extremely limited in this case.

Equity financing is the sale of a company’s assets or shares.

The owners of the enterprise give away part of the business in exchange for financing the activity.

Benefits of project finance for business

This option for financing long-term projects (energy, transport, environment), as well as projects in the field of public services, is based on a financial model without collateral with the repayment of debt from the future cash flows of the project.

Project finance offers investors, lenders and other stakeholders the opportunity to allocate costs, benefits and risks in an economically feasible manner by choosing and applying specific financial instruments used for a strictly defined purpose.

According to the Energy Outlook 2021, the combined market for wind and solar PV technology in Europe could grow by 35 GW during 2021, requiring an investment of 60 billion euros in Solar energy project financing.

The global renewable energy agency has shown steady growth over the past decades. 

The International Energy Agency says wind power will grow by 8% and solar power by 13%.

Once completed, the solar power plant becomes the cheapest technology to operate for power generation, since solar radiation is available completely free of charge, and modern equipment requires minimal operating costs.

Thus, renewable energy sources easily displace fossil fuels as soon as they enter the market.

This gap will widen even further in 2021. Positive market trends plus preferential terms persisting in many countries will drive the sector’s growth. This is complemented by technological advances that have made newly built solar power plants cheaper on average than coal or nuclear power plants.

An important point in the context of increasing the competitiveness of solar energy is the correct choice of solar energy project financing. 

Among the potential instruments for the implementation of these capital-intensive projects, long-term investment loans and complex project finance instruments are now available to businesses.

CP Finance UK provides optimal financing solutions for major renewables and Solar energy project financing around the world.

Our specialists are ready to provide customized solutions for each project, from long-term financing to the development of technical documentation and the construction of a solar power plant under an EPC contract.

We help numerous clients in the development of solar projects in Europe, the Middle East, USA, Latin America, Southeast Asia and Africa. Contact our representatives and get a free consultation.

Construction of solar energy plants: Long-term bank loans 

The implementation of solar project financing can be protected by real guarantees in the form of securities, real estate, movable property and other valuable assets.

If there is not enough collateral, the financial institution may request one or more guarantors to provide debt repayment in the event of a default on the borrower’s company.

Considering that the construction of a large solar power plant with an installed capacity of 100 MW may require about $ 80-100 million or more, some projects are financed by bank syndicates, rather than individual banks. 

A bank loan is one of the oldest and most popular business financing instruments that remains in high demand in solar energy.

A significant percentage of the $ 2.7 trillion invested in renewable energy sources in the world over the previous decade came from long-term loans.

Some of the features of the latter are listed below, hence there is no fundamental difference between short-term and long-term loans

• The interest rate can be fixed or variable, the latter being common. Recently, loans with a more complex variable interest rate are often offered. 

• Long-term loans for the construction of solar power plants are usually provided for a period of 5-7 years or more, depending on the type of project.

Syndicated loans are provided for the implementation of large projects through one credit operation.

This type of lending helps energy companies reconcile the demand for large volumes of financing with their desire to avoid excessive concentration of risk from financial institutions. 

Project financing  of solar power plants 

Large enterprises making long-term investments today are forced to attract capital from outside, since they rarely have significant amounts of their own funds.

Various financial instruments come to the rescue, which include loans, leasing and project finance. Energy companies that run several expensive projects at the same time or are faced with debts for previously consumed energy need capital for further development and implementation of large projects.

PF opens up new opportunities for business expansion, relying on the prospects of a specific project, and not on the assets of the borrowing company.

Along with the growing popularity of project finance and the development of more and more efficient variants of this method, it is becoming suitable for smaller and smaller projects.

The project finance (PF) method is one of the most advanced methods of raising funds for large solar energy project financing and other capital-intensive energy facilities.

The PF allows a business to attract significantly larger funds in comparison with traditional bank lending.

Borrowers should understand current financial market offerings and carefully analyze individual offers.

CP Finance UK  is ready to provide you and your employees with comprehensive advice on the implementation of investment projects.

Benefits of project finance for solar energy sector

PF can be characterized as a method of financing investment projects, separated from the initiators of the project, in which the main source of debt repayment is the cash flow generated by the project, and the debt is secured by the assets of the project, but not by the initiator company.

The basis for the success of project finance for solar power plants is the reliability of financial institutions and an adequate assessment of the profitability of an investment project and its future cash flows.

Benefits of solar energy project finance include the following:

• Ability to involve government agencies, national and international institutions in order to monitor the implementation of projects. 

• Off-balance sheet nature of financing, which contributes to maintaining a high creditworthiness of the initiator of the solar project. 

• Relief of the public sector from high capital expenditures.

• Attraction of significant borrowed funds that cannot be obtained using traditional financial mechanisms, such as a bank loan.

Potential investors should consider possible hidden costs. In particular, there may be additional costs associated with loans and financial derivatives.

Often there are costs associated with a complex procedure, including diversification of risks and distribution of responsibilities of the parties involved in the project.

Mishaps associated with the implementation of a solar energy project financing using project finance is the risk of conflicts between individual participants involved in the project. 

The PF ensures the attraction of adequate resources and diversification of risks. 

Disadvantages of  Solar energy project financing using project finance:

• Political barriers. Political risks are relevant not only for developing countries with their unstable legislation and high levels of corruption.

Today, some countries are abandoning incentives for solar energy, leaving existing projects alone with market reality. 

• Economic barriers. The danger lies in a decrease in demand and a drop in the cost of generated energy after the guaranteed period. Abrupt changes in the structure of the economy can change the market environment. The lack of capital in some markets also creates certain problems for attracting solar energy projects financing.

• Technical barriers. Power generation is difficult to accurately predict due to changing environmental conditions and fluctuations in solar radiation. It is also important to consider that technological progress brings more and more new technologies that can compete with the current project.

Choosing a financial model for a solar energy project 

The first business model is to finance the construction of a solar power plant through a long-term bank loan. In many countries, such a loan is not difficult to obtain by holding a successful auction and submitting a serious business plan.

The second business model involves the organization of project finance (PF) with the involvement of an investor who, at a price determined depending on the capacity of a given facility, finances its construction and acquires ownership of this asset. Sometimes the company, in addition to cash injections associated with the completion of the solar power plant, receives a long-term contract for its maintenance.

The transaction is usually carried out as the purchase of shares in a limited liability company whose assets are a photovoltaic installation.

Typically, a long-term contract for the operation and maintenance of the facility is signed between the same parties. The company that is the subject of the transaction receives a guaranteed sales price for the energy produced for 10-20 years and guarantees the estimated costs necessary to keep the installation at the highest level of efficiency.

Companies that succeed in the auction often have limited time to expand their PV capacity.

What is the best financial model for a solar power plant project today? 

As mentioned above, there are two main ways.

How much does a 1 MW solar power plant cost?

The cost of building a solar power plant remains a secret, which is revealed to the initiator only as a result of detailed design calculations and negotiations with potential contractors and equipment suppliers.

The cost of each megawatt of installed capacity can be named only approximately, focusing on the specifics of the project and the market of the host country. 

What should be consider when planning a solar project

Unfortunately, the photovoltaic industry is a complex business and the greatest risk comes from the investment time horizon.

The investment period is at least 10-15 years from the date of the first sale of energy. During this period, the cash flow for electricity sold is usually guaranteed at the level offered at the auction and indexed for inflation.

After this period, it is necessary to forecast the price for the entire remaining life of the installation.

The use of advanced financial models for the construction of solar power plants (for example, project finance) has transformed renewable energy in the last few decades, making it an affordable business with a low threshold for entry.

Solar energy project financing is becoming an increasingly promising field of investment for investors these days as the market matures and grows across the world. 

The project depends on successful planning, engineering design of a solar farm, finding and preparing a suitable site for construction, obtaining licenses, supplying electrical components and metal structures, installation, etc.

If you are planning to build a large solar power plant, contact our consultants.

Our financial and technical team will help you get the expected construction cost estimate, select engineering solutions and determine the optimal financial model for a specific project.

Email:finance@cpuk-financeltd.com
Website:https://c-pfinanceuk.com/