Financing of  large infrastructure projects creates stable jobs and spurs growth in other sectors of the economy.

Infrastructure development is now a priority for the world’s leading economies.

The state and quality of infrastructure is one of the criteria for socio-economic development and a powerful lever for the growth of social welfare.

Energy, water supply, transport and telecommunications directly affect the quality of life of the population.

The key problem in the implementation of new investment projects is the correct choice of financing scheme. This complexity can be attributed to limited government spending and the growing range of potential funding sources offered by markets (including investment loans).

One of the most important models for financing large infrastructure projects is project finance (PF).

In this case, the planning, financing and management of the project is carried out through a special purpose vehicle (SPV), the shareholders of which are companies interested in the project.

With the growing need for financing large infrastructure projects, dissatisfaction with the current quality of infrastructure and limited resources of the state budget, the PF is becoming an increasingly important instrument that meets the interests of business and society.

A prerequisite justifying the need to use long-term loans for financing of large infrastructure project is the convenience of its use in public-private partnership projects.

CP Finance UK Finance finances infrastructure projects around the world, including Europe, the United States, Latin America, the Middle East, Africa, East Asia and other regions.

We offer investment loans for the construction of roads, pipelines, seaports, electrical substations, wastewater treatment plants and other facilities.

Our finance team helps clients obtain large loans from European banks, attract venture capital and interested private investors. We also offer clients all kinds of financial advice, tax optimization and other services.

The essence of financing for large infrastructure projects

Infrastructure can be defined as artificial, permanently located public facilities that form the basis of economic life due to its functions of moving people and goods, supplying electricity, water, and so on.

Leading economists also highlight the so-called social infrastructure, which indirectly supports the development of the economy, satisfying the intangible needs of the population.

Infrastructure plays a leading role in the functioning of the social system. Infrastructure activities are usually controlled at the local level, as the development of roads, urban transport, seaports, water pipelines and power grids is the responsibility of local authorities.

Financing of large infrastructure projects often requires public participation. In Europe, the importance of this issue is emphasized through co-financing from the European budget.

Infrastructure projects can also be categorized according to their range (eg international, national, regional, local).

Economists often distinguish between public and private infrastructure.

The term “infrastructure investment” refers to the investment in infrastructure assets to obtain specific benefits at the perceived risk.

There are the following types of financing for infrastructure projects.

First, an investor can buy securities of an infrastructure investment company.

Secondly, a financial institution can provide an investment loan for the construction or expansion of the related infrastructure.

Finally, it can be subsidies and grants for strategic projects.

The company can also decide on direct investments, including expansion, modernization, reconstruction or construction of a new infrastructure facility. In the context of infrastructure investment, so-called intangible investments are important, including R&D expenditures, which play a critical role in sectors such as communications and energy supply.

Infrastructure investments can be classified according to the source of funds. Here we are talking about public, private and public-private investments made jointly by both sectors.

Infrastructure is characterized by specific features that determine the planning and implementation of investment projects.

Obviously, these features influence the choice of financing models.

• Specific objectives: infrastructure facilities provide public services in the area of production or consumption, therefore financing of such projects is important for the whole society.

• Structural cohesion: Infrastructure projects usually require the construction of the entire facility to achieve planned functionality.

• High capital intensity: the construction and operation of infrastructure facilities are associated with significant costs with a long payback period.

• Longevity: Once built, infrastructures can define the landscape of production and population systems for an extended period of time, continuing to serve for decades or even centuries.

• Lack of mobility: infrastructure facilities are permanently connected to a specific region, which implies the use of local services.

The above information reflects the specifics of the infrastructure.

Funding models for infrastructure projects should take into account capital intensity, high risk and long investment project cycle.

This limits the financing options available, and sometimes excludes the participation of a private investor who expects a return on capital invested in the shortest possible time.

Fundamentals of financing large infrastructure projects

Funding for socially significant infrastructure projects is based on three principles, which clearly indicate the distribution of responsibilities between private companies, authorities, other institutions and users:

• Principle of financial responsibility: public authorities are responsible for project preparation, while private partners are largely responsible for construction and operation.

• The principle of decentralization: each part of the project is carried out by the participant who is most effective in the given conditions. The state usually provides technical assistance, subsidies and regulation of the process.

• Principle of microeconomic optimization: this principle is widely applied to users who cannot be directly attracted to finance construction.

In the case of financing private infrastructure projects, the situation changes dramatically.

According to these principles, responsibility, including investment risk, is allocated mainly between private companies and users.

The financial participation of the state in the implementation of large infrastructure investment projects is determined by numerous factors, including the economic activity of the state, its propensity to invest in public projects.

In addition to financial motives, the private sector can participate in financing  for large infrastructure projects (investment loans) for the following reasons:

• An infrastructure project is essential to achieving business goals.
• Allocated public funds are insufficient to finance the growing business needs for maintenance and infrastructure development.
• The participation of private equity in infrastructure investments is a significant factor in negotiations with the authorities.
• Companies strive to serve the community by providing infrastructure services at a reasonable price, quality and quantity.

In the 1990s, Europe saw a shift in responsibility for the transport infrastructure network and utilities, from state to corporate, as it required the highest possible return on investment.

Today, private companies build, operate, maintain and upgrade numerous roads, bridges, tunnels, seaports and terminals, water treatment plants, gas pipelines and oil pipelines around the world.

All this reflects a clear trend towards shifting responsibility for public projects to private companies.

Against this background, the search for funds to finance large infrastructure projects has intensified, since business is looking for the most convenient and profitable sources both in the form of investment loans and in the form of combined PF instruments.

Private equity in financing infrastructure projects

In many European countries, the provision of infrastructure services is still the responsibility of municipalities, which determines their key role in such projects.

Municipalities are involved in infrastructure construction in a variety of ways:

• Implementation of projects using the resources of the local community.
• Creation of special purpose vehicles to attract external financing.
• Inclusion of private companies in accordance with applicable law.

Project finance is a principle in which the tasks of municipal authorities are partially shifted to an SPV (Special Purpose vehicle) created for these purposes.

This approach is becoming more common.

As previously outlined, the public sector’s objectives in the provision of public services are changing in recent years. Although such projects are traditionally considered unprofitable, it should be noted that there has been a significant increase in the attraction of private equity through SPVs for the implementation of infrastructure projects.

This method of financing has certain advantages for local authorities.

First, an SPV can raise significantly more funds than the limits set for municipal companies in many countries.

Second, paying off the investment loan disciplines utility companies, making them more efficient.

Finally, attracting private investors through SPVs requires significantly less bureaucratic procedures than financing directly from the budget.

To avoid abuse in the implementation of infrastructure projects with state participation, it is important to ensure maximum transparency of investments with the involvement of professional financial and management teams.

In general, insufficient investment in infrastructure with limited resources of the state budget is today the main motive for finding new solutions that would make infrastructure projects more profitable for the private sector.

The starting point for private participation in infrastructure investment is the emergence of management initiative. According to this principle, the management of a public service provider or the management of a private company should be based on the same principles.

This management approach delivers customer focus, efficiency and innovation with benefits for business and society as a whole.

Despite the current significant differences between the management of public and private entities, in both cases the goal is to improve efficiency and increase the value of the company.

Why does this approach find application in infrastructure investment?

It should be borne in mind that the traditional management of infrastructure and the provision of public services by state-owned companies has become ineffective.

The reasons for attracting private equity may be as follows:

• Failure of the public sector to provide adequate quantity and quality of public services in the municipal sector.
• Chronic budget deficits and insufficient motivation of local government to work effectively on infrastructure projects.
• Growing social expectations and environmental demands.

On the one hand, modern conditions have required public authorities to train the private sector and use effective mechanisms already developed in this sector.

On the other hand, they opened the way for private companies.

Thus, models of financing infrastructure projects have emerged, involving increased participation of the private sector in the ownership and / or management of infrastructure facilities.

Infrastructure service models

Currently, there are different approaches regarding the allocation of costs, risk and, as a result, the sharing of rewards.

We can distinguish four models in the provision of infrastructure services.

In the traditional (German) model, the responsibility lies with the municipality.

The British model combines the functions of owner and operator in a private company. The private initiative to finance infrastructure services or investments is supported by a related UK government program.

Management contracts, leasing, concession are options of the French model, in which the operator is selected by the municipality through a tender. Without losing control over the infrastructure, the commune can ensure efficient management and modern technology.

Finally, the industrial model refers primarily to industrial infrastructure.

Here, a private owner hands over the infrastructure to specialized operating companies in order to improve efficiency and reduce operating costs.

Each of the listed models has its own advantages and disadvantages. Thus, the German approach to infrastructure projects ensures low cost of public services. On the other hand, the British approach is more flexible and less bureaucratic, independent of politics.

The experience of other countries shows the feasibility of using individual models for specific activities. The German model finds particular application in the water supply, sewerage and heating sectors. It is used in Germany, Portugal, the Scandinavian countries and the USA.

The British model is only popular in the United Kingdom in the water and wastewater sector. The French model, which dominates France and the developing countries of South America, focuses on the wastewater, heating and waste management sectors.

Finally, the industrial model is appropriate when a company that owns an infrastructure wants to improve its functioning. Local government policies also play an important role in this matter.

The World Bank, promoting the French model, describes options for financing infrastructure services in the context of the growing private sector participation in these activities.

BOT, BOOT, concessions, leasing, public-private partnerships, management and maintenance contracts – the implementation of these projects today takes a variety of forms.

An individual or company can participate in infrastructure financing, infrastructure management, and both. Such cooperation can be carried out in the form of leasing, concession, sale of assets or the creation of joint ventures.

Investment loans for infrastructure construction

An investment loan is a type of loan provided to companies to finance new investment projects.

This type of financing is characterized by a significant amount of available funds.

To obtain an investment loan for the construction of infrastructure, a company usually needs to make a contribution of up to 20-30% of the total planned investment costs.

CP Finance UK Finance is ready to provide an investment loan on the most favorable terms with an initial contribution of the project initiator of 10%.

Investment loans for businesses can be provided for up to 15-20 years.

This option has a number of significant advantages. First, the company can repay the loan before the agreed period expires. Secondly, banks can provide grace periods.

The role of project finance in infrastructure development

The above features of infrastructure projects require careful planning of projects, given their high capital intensity and long payback period.

Among the features of project finance for infrastructure projects, it is worth noting the use of high financial leverage, lending to companies without an operating history, and a complex structure of project participants.

History of project finance: global experience

The project finance method is applicable to many investment projects.

PF as a concept based on the use of private capital to finance investment in public services has a long history. As early as the 18th and 19th centuries, the road network was renewed in England, where the source of return on private investment was the toll for the use of the road.

The development of railroads, water, electricity, and telephony in the 19th century also required private equity. In the first half of the 20th century, the state assumed these responsibilities in many countries, but over the past 25 years, the process has reversed again.

Project finance in natural resources (coal, oil, gas) began in the 1930s in the United States.

This was followed by the development of oil fields in the North Sea (1970s) and other projects related to the development of mineral deposits in Australia and other parts of the world.

The use of project finance in the energy sector also began in the United States, where the Private Utlity Regulatory Policy Act was adopted in 1978 to support the development of private energy production (IPPs, or Independent Energy Projects).

A consequence of the processes of privatization and deregulation in the United States were similar processes in the energy sector in the UK in the early 1990s and then around the world.

The growth of PF over the past 20-25 years is mainly associated with global deregulation processes.

Co-financing of large infrastructure projects as roads was intensive in the UK in the 1990s thanks to the Private Finance Initiative (PFI).

Currently, these projects are called public-private partnerships.

One of the areas of use of project finance for infrastructure projects is also telecommunications, in particular the financing of mobile networks, which developed intensively in the late 1990s.

Today, project finance is also supported by the internationalization of investment processes.

Leading investors, consultants and lenders have projects from all over the world in their portfolios and use the experience gained in numerous projects.

Project finance is perceived as a method of financing large infrastructure projects and complex investments with increased risk. However, there are no restrictions on the amount of debt, so the use of the PF is possible for relatively small projects, including those implemented in small settlements for the local community.

CP Finance UK Finance investment services in Europe and beyond

CP Finance UK Finance provides a full range of financial services related to the construction, modernization or expansion of infrastructure around the world.

We offer financing for large infrastructure projects of all types.

Our interests cover the following projects:

• Highways and bridges.
• Sea ports and cargo terminals.
• Power plants, substations and transmission lines.
• Wastewater treatment facilities.
• Oil and gas pipelines.
• Social infrastructure, etc.

Interested in raising funds for the implementation of large infrastructure projects?

CP Finance UK Finance will answer any of your questions regarding investment lending and project finance.

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

The construction of liquefied natural gas plants presents a huge investment opportunity for energy companies in Europe, the Middle East, North Africa and Latin America.

The cheapening of technologies and equipment for liquefying natural gas and transporting LNG makes this type of fuel more and more attractive to consumers around the world.

LNG demand and production are expected to rise in the coming years, which will contribute to significant savings in many sectors and an acceleration of the global economy.

Morgan Stanley research shows that massive investments in new terminals, ships and liquefied natural gas plants will soon pay off. According to the agency’s estimates, the new capacity will lead to global growth of this market by 50% by 2025.

CP Finance UK Finance offers financing and construction of liquefied natural gas plants under an EPC contract.

For over 20 years our specialists have been offering financial and innovative solutions in the energy sector for private companies and government customers.

In this article, you will learn more about the prospects for investments in LNG plants, new technologies for the production of liquefied natural gas and our opportunities.

Liquefied natural gas plants: new investment opportunities

Liquefied natural gas is a non-corrosive, odorless cryogenic liquid made up of 90% methane.

Liquefied natural gas is a revolutionary fuel that could spur global economic growth over the next decade. It is becoming a more affordable fuel thanks to the development of technologies and the groeth of an extensive infrastructure for the production, transportation and regasification of LNG.

The LNG industry value chain consists of four links:

• Extraction of natural gas.
• Purification and liquefaction.
• Transportation.
• Regasification.

upon extraction, natural gas is transported via pipelines to liquefied natural gas plants, where it undergoes preliminary treatment.

This treatment removes all liquids and other components that may freeze (propane, butane, ethane, carbon dioxide and water). Then the gas is converted into a liquid state by deep cooling at atmospheric pressure, during which the volume is reduced by 600 times.

The resulting product is loaded onto LNG carriers, which are equipped with refrigeration and insulation systems to store and maintain the liquid state of the gas until it reaches the port of destination (LNG terminal).

The gas that evaporates during transportation is used as fuel.

In an LNG terminal, liquefied gas is vaporized during the heating process. The terminals have storage tanks that provide a continuous flow of gas into pipelines and cover peaks in demand.

Finally, after pressure regulation, natural gas is pumped into the main gas pipeline and sold to distributors or directly to power plants and large industrial consumers.

In some cases, liquefied is supplied to consumers by specially equipped tank trucks.

The importance of LNG for the global economy

In recent years, hydraulic fracturing has revolutionized the US energy sector, making the country the largest exporter of energy for the first time.

However, until recently, the role of liquefied natural gas plants in the global economy was small due to the technical difficulties associated with transporting and storing this flammable gas.

Experts predict that cheap LNG exports in the coming years will reduce energy prices in Europe and Asia, thereby stimulating the energy sector and commodity markets.

In the late 1990s, concerns about oil shortages arose in developed countries. The emergence of hydraulic fracturing technology, which is used to release gas and oil under high pressure, has radically changed the situation in the energy market.

Natural gas prices have declined 80% since the mid-2000s, largely driven by exponential growth in shale gas production in North America.

Thanks to the boom in shale gas, coal consumption has fallen in half and CO2 emissions have fallen by 25%.

This is despite the fact that in those years it was very difficult to transport and store natural gas, and the main share of gas exports fell on expensive gas pipeline systems.

The situation changed with the advent of LNG: natural gas became liquid and it is now very easy to transport it by tanker trucks or ships. For this reason, experts are talking about big changes in the energy market, opening up investment opportunities for the next few years.

Economic implications of increased LNG production

Building new liquefied natural gas plants could forever change the gas market and the energy companies that make money from it.

The LNG industry will affect the following companies:

• Engineering companies (EPC contractors).
• Transport companies (including ship owners).
• LNG equipment manufacturers.
• European chemical manufacturers.
• Other gas consumers.

Engineering and construction companies will clearly benefit from the introduction of the new fuel, as multibillion-dollar LNG production, transportation and regasification projects are under way around the world.

Industrial equipment manufacturers receive orders for new equipment and everything related to it. This represents a potential growth of 50% over the next five years over the previous decade.

Finally, chemical companies and other industrial gas consumers will benefit from reduced energy costs.

This will affect regional markets and change the direction of energy-intensive product flows.

The switch to LNG could put more pressure on other sectors, including those dependent on coal. Coal carriers may face a 5% decline in revenue in 2020 as more customers switch from coal to gas.

It should be noted that the construction of LNG plants around the world has a positive impact on the environment. Liquefied natural gas offers an alternative with lower CO2 emissions compared to solid fuels. However, the environmental benefits of switching to LNG vary greatlu.

Supply chain efficiency is key as distribution factors such as methane leakage can reduce these benefits.

Investment risks: In the LNG industry, long-term contracts are the main mechanism for ensuring coordination between all parts of the value chain.

Such coordination is necessary because the production capacity of Liquefied natural gas plants is in many ways limited by the capacity of transport systems.

The liquefied natural gas industry has a high level of investment risk due to the small number of alternative uses for LNG plants, terminals and ships, as well as the high volume of investments. Until now, there is high uncertainty about large LNG projects.

The risk factors for the construction Liquefied natural gas plants are as follows:

• Product prices are falling faster than costs.
• Concerns about security of demand (risk of recession).
• Conflicts in the distribution of gas supplies.
• Financial obstacles of all kinds.
• Environmental problems.
• Political tensions.

Uncertainty complicates the process of making investment decisions, since it is not known how much capacity will be commissioned in the coming years.

The risk is clear when you look at the delays that some companies face.

These delays are due to financial, environmental, social, regulatory and political issues. The planning, construction and commissioning times for LNG plants sometimes reach 4-6 years. During this time, the economic situation, demand and production can change significantly, so investors need accurate forecasts.

Liquefied natural gas plants: projects technology

Liquefied natural gas production is a proven technology that has been successfully used in the energy sector for many years.

Typically, an Liquefied natural gas plants consists of the following elements:

• Gas pre-treatment and liquefaction line.
• LNG production equipment.
• Protected gas storage tanks.
• Equipment for loading gas carriers.
• Auxiliary systems.

The transformation of natural gas into a liquid state is carried out in several stages. In the first stage, impurities (primarily carbon dioxide and minimal residues of sulfur compounds) are removed.

Then water is removed, which can turn into crystals and damage the system.

The next stage is the removal of heavy hydrocarbons, after which mainly methane and ethane remain. Recently, for the purpose of complex gas purification from moisture, carbon dioxide and heavy hydrocarbons, the adsorption method of deep gas purification on molecular sieves has been used. The gas is then gradually cooled by passing through several heat exchangers (evaporators).

Purification and fractionation are carried out, like most cooling processes, under high pressure.

The temperature is reduced to -160C using refrigeration cycles. Under these conditions, natural gas becomes a liquid at atmospheric pressure.

The construction of LNG plants begins with the selection of the most suitable technology.

There are currently seven LNG production technologies in use worldwide, including AP-C3MR, AP-X, AP-SMR, MFC, PRICO, DMR, Liquefin and Optimized Cascade.

However, Air Products remains the industry leader.

The AP-SMR, AP-C3MR and AP-X processes developed by this company account for over 80% of the market.

The only competitor for these processes is Optimized Cascade technology from ConocoPhillips.

AP-SMR (single mixed refrigerant) is traditionally used for onshore LNG plants, typically with a capacity of up to 1 million tons per year per line. Several separate lines are needed to increase the capacity of the plant. A feature of the AP-SMR is a unified automated system that simultaneously controls several gas turbines. The use of a mixed refrigerant increases the efficiency of heat exchange.

AP-C3MR is often used in the construction of LNG plants.

This technology accounts for the vast majority of the world’s liquefied natural gas production capacity. The AP-C3MR process uses two separate refrigerant cycles. The propane cycle is designed to pre-cool natural gas and partially dilute the refrigerant, and in some cases remove fuel gas (used for plant needs), while the mixed refrigerant cycle is used to liquefy and sublimate natural gas.

C3MR is a proven technology, proven over decades, making it suitable for many onshore plants. For floating LNG plants, this technology looks less attractive due to the large supply of propane, especially when kettle-type heat exchangers are used. Storing propane requires an increased strength tank where the working fluid is stored.

Since the C3MR process in floating LNG plants is of low appeal, Air Products has developed the more efficient AP-X technology (which is used in a number of large production lines in Qatar). An external nitrogen cycle is used to liquefy natural gas. Compression of nitrogen refrigerant is performed in three stages, which helps to optimize the process when there are significant fluctuations in natural gas flow.

The above technologies for the production of liquefied natural gas, as a rule, are used for the production of large volumes intended for further export.

Low-tonnage LNG plants also have a high development potential, meeting the demand of individual enterprises.

Estimated cost of building LNG plants

The gas industry is characterized by significant investment in infrastructure, unlike other solid or liquid energy sources that are easy to store and transport without an increased risk of loss.

The fact that natural gas is difficult to extract and transport via gas pipelines to the consumer’s boiler has slowed the development of the sector for many years.

It would seem that these disadvantages are not inherent in LNG, since it is transported in liquid form by sea like oil, without pipeline restrictions. But the fact that it must be liquefied and stored at low temperatures makes it difficult to handle and requires strict safety regulations.

Consequently, the LNG value chain also requires large investments.

Today, we see a reduction in capital costs at all links of the chain, including the production of LNG. This is happening both as a result of improving technologies and increasing capacities, and as a result of increased competition between technology and equipment suppliers, shipyards, etc.

Over the past 10 years, the cost of capital per unit of production at liquefied natural gas plants has decreased by 25%, for LNG tankers this figure has dropped by 35%, and at regasification terminals by 20% over the same period.

The cost of LNG plants can vary widely.

Building an LNG plant in Norway is not the same as implementing a similar project, for example, in Nigeria. Obviously, the availability of engineers, trained personnel, workshops and logistics services plays an important role.

Building a liquefied natural gas plant or receiving terminal near an existing port is not the same as building tens of kilometers from the sea coast. Floating LNG plants require a specific approach.

The approximate investment amounts given below are only averages and can vary greatly depending on the project conditions.

In the late 2000s, building an LNG plant from scratch with an estimated capacity of 8 million tons per year (MTPA) cost $ 1.5-2 billion.

Of this amount, 50% was for engineering design, construction and installation, 30% for the purchase of equipment, and the remaining 20% ​​for building materials.

The previous example refers to large LNG plants designed to supply large existing markets.

On the other hand, when a company is about to open up a new market or cover an emerging shortage in a small market, it makes sense to build a smaller plant with the prospect of future expansion.

Building LNG plants with a lower capacity is more expensive in terms of MTPA.

Thus, a plant with a capacity of 4-5 million tons of LNG per year at the end of the 2000s cost about $ 1 billion.

Due to the reduction in the cost of technology and equipment, the cost of liquefied natural gas plants has dropped significantly, and the scale of projects has increased.

Our services in the field of construction of LNG plants

CP Finance UK Finance offers a full range of services in the field of financing and construction, modernization and expansion, maintenance and operation of liquefied natural gas plants in Europe, Latin America, North Africa and the Middle East.

Services include:

• Feasibility study and financial modeling.
• Development of a general project and detailed design.
• Design and manufacture of customized LNG equipment.
• Construction and commissioning.
• Consultations during the operation of the plant.
• Modernization and expansion.

Cooperation with CP Finance UK Finance brings clear benefits to our customers in the form of favorable financing conditions, cost-effective production, high reliability, long equipment life and a quick return on investment.

We can design the optimal workflow for your business in order to simplify your LNG production scheme, saving on future plant expansion. A tailor-made approach contributes to reduced feed gas consumption, stable operation at low pressure and other benefits.

CP Finance UK Finance and partners help major energy companies around the world to achieve their goals.

In recent years, the EPC contract has become the most common form of cooperation in the construction of large-scale facilities such as LNG plants and terminals.

The advantage of an EPC contract for investors is that a single professional contractor performs all the work and bears full responsibility for the implementation of the project.

Contact us at any time to learn more about the construction of LNG plants under the EPC contract.

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

The global project finance and bank lending market continues to grow exponentially, offering large businesses new tools for implementing capital-intensive and high-risk projects in various industries.

project finance and bank lending plays a critical role in the development of such projects, being the main way to provide funds for the construction, expansion and modernization of factories, power plants, seaports, roads and pipelines.

CP Finance UK, specializes in project finance and bank lending services for capital-intensive projects and large businesses.

We are ready to offer project finance and bank lending to clients with loans from 50 million euros with a maturity of up to 20 years on the most attractive terms in your sector.

The list of our offerings also includes financial modeling services, bank guarantees, project management, investment engineering, industrial engineering, consulting and much more.

Thanks to broad competencies, international business contacts and rich practical experience, our financial team successfully implements projects in most countries of the world. Share your investment plans and learn more about our advantages.

The essence of project finance and bank lending

PF is the most difficult method of financing in terms of organization and planning.

This method is applicable to projects whose value significantly exceeds the current assets of the initiators. The reason is that it is extremely difficult for project sponsors to convince a financial institution to borrow more than the value of their entire business.

Loan terms in project finance are set according to the expected cash flow, so the maturity, interest and fees associated with the repayment of loans are adjusted individually depending on the specific project and its market.

At present, the capitalization of the banking system of the USA, Great Britain, as well as Spain and other developed European countries makes it possible to issue loans for capital-intensive projects.

However, in the case of loans exceeding several hundred million euros, syndicated loans are often used, including those issued by international consortiums.

Banks and large banking consortiums are the main lenders that provide debt financing for large projects in the form of a principal loan or a subordinated loan.

Project finance (PF) uses a wide range of alternative and complementary financing schemes that share common features.

The concept of project finance for large business projects does not depend on the creditworthiness of shareholders (sponsors) and the value of assets involved in a particular project. This tool allows businesses to finance bold ideas based on forecasting financial flows and profitability. In other words, the decisive factors in project finance lending are the forecasting of the effectiveness of a particular project and the assessment of its risks, but not the financial health of its sponsors.

In a sense, this is a violation of the fundamental principle of corporate finance, according to which the key requirement for lending is the reliability (creditworthiness) of the borrower.

The distinctive feature of project financing is the possibility of issuing a loan for large projects without regard to the positive financial history of the borrower.

Debt incurred on a Special Purpose Vehicle (SPV) created by sponsors for a specific project is not reflected in their balance sheet. For sponsors, this means the off-balance sheet nature of the debt, which is consistent with the principle of limited liability of shareholders and is associated with increased creditworthiness.

SPV debt does not burden the financial statements of member companies, or shareholders.

On the other hand, the existing financial obligations of the shareholders do not have a direct impact on the debt of the Special Purpose Vehicle and its current operations.

An indirect connection between the reputation of the participants and the financing of the project still exists. Although project finance is based on lending to companies without a long credit history, the creditworthiness of the company’s shareholders is taken into account by the potential lender and reflected in the terms of the loan agreement.

The ability of the new entity to incur debt may be higher in the case of project finance, as the high proportion of debt in the project’s capital structure allows participants to use high financial leverage.

This imposes certain requirements on the professional management of the project and creates the prerequisites for more active participation of the lender at all stages of the project life cycle. The intervention of the lender covers all stages of the project, up to the repayment of the loan with the corresponding interest. Strict control over investments requires the establishment of an independent company that “isolates” this project from other activities.

The risks, profits and responsibilities of each of the participants in project finance schemes must be legally and economically separated in order to ensure effective project management at all stages.

Differences between PF and corporate lending

Project finance lending is based on specific methods of risk analysis and protection of participants’ interests.

Unlike traditional methods of corporate lending, it is initially impossible to adequately assess the future financial results and assets of a company created to implement a specific project.

In corporate lending, the bank pays attention to the following:

• The financial health of the borrower, assets and creditworthiness, which means the ability to repay the principal and interest under the loan agreement within the specified time frame.

• Key financial parameters of the investment project, its advantages and risks for the borrower in the context of their impact on creditworthiness.

In Project finance and bank lending, the bank evaluates the following aspects:

• An investment project in terms of efficiency, profitability and benefits for its participants.

• The reputation of the project participants in terms of their creditworthiness and professional competencies, their ability to obtain the predicted benefits from the project.

In the case of corporate lending, we deal mainly with the assessment of the borrowing company, but in the second case (PF), the investment project assessment comes first.

The order, content and volume of the analyzed questions are radically changing.

The corporate finance model for large projects is based on separating bank risk from project risk. Credit risk is identified with the solvency of the borrower and the value of the collateral offered, regardless of the success or failure of the financed investment project.

The PF usually does not include borrower checks or only minimally includes them. In this case, the borrower arranges the financing scheme in such a way as to meet the strict requirements of all the parties involved in the project, primarily banks.

The reliability of sponsors, contractors and other business partners associated with investments is carefully evaluated. In both cases of corporate and PF lending, the risk and possible causes of its occurrence are carefully studied, and measures to minimize it are developed.

In project finance, the risk of a bank is in practice equal to the risk of a given investment project.

The analysis of credit risk is carried out in terms of the total return and debt servicing capacity of the SPV on a current basis. This analysis is based on capital structure and debt coverage ratios.

In addition to the difference in the order and volume of analyzes and studies carried out in corporate lending and PF, experts point out another difference in the procedure for obtaining a large loan.

The traditional framework procedure is as follows: the borrower learns the terms of the loan, applies for the loan, and accepts the bank’s decision. Since in the case of PF there is no borrower at the very beginning of the project organization process, the approach to obtaining a loan is changing.

The terms of the loan affect the profitability of the investment, so the sponsors expect the bank to initially evaluate the project in terms of the correctness of its assumptions. In PF models, lenders can assess the investment risk of a project before the SPV is established, and sponsors will take the necessary steps to adjust the investment vehicle when they hear the lender’s opinion.

The above considerations show that, compared to traditional financing methods, project finance can be a more expensive solution. These will be higher interest rates and higher fees as the terms of the loan are overly flexible and the risk is much higher. 

Planning and organizing lending in project finance

The main stages of deal preparation and project evaluation are presented below:

1. Analysis of the project, including the identification of potential risks, their assessment and the development of practical measures to minimize and control them.

2. Optimization of the project financing structure, including the share of sources of debt financing, the size and form of the authorized capital of the SPV.

When evaluating an investment project by a bank, four types of analyzes can be distinguished, covering various areas.

These are technical analysis, financial analysis, reliability analysis of project participants, identification and distribution of risks.

The technical analysis evaluates the technological feasibility and operational efficiency of the project. Among other things, the expected costs, the investment period, the technical parameters of the facility, the expected operating costs, and the compliance of the planned facility with environmental protection standards are checked.

Economic and financial analysis is used to objectively assess the sufficiency of the projected financial flow generated by the project to service the debt.

This analysis provides an answer to the question of whether the remaining funds will be a satisfactory reward for investors.

The main risk assessment tools are financial analysis based on cash flow forecasting, as well as debt service ratio calculation and sensitivity analysis. To evaluate the project, lenders use such financial indicators as the rate of return and cost of capital, payback period, NPV, IRR and others. In these studies, discounted cash flow methods, sensitivity analysis, scenario and simulation modeling play an important role.

When accepting increased project risk, the lender applies more sophisticated procedures to evaluate the effectiveness and risk of investments.

Identifying potential threats is critical as any unidentified risk remains uncovered and exposes the bank to excessive risk.

The high profitability of the project, taking into account the risk, is a necessary but not sufficient condition for lending. The bank should conduct a credit risk analysis based on the assumption that the main threat is a decline in the borrower’s ability to service credit. This analysis is based on debt structure and debt coverage.

The Risk Identification and Allocation Analysis includes elements of all analyzes and summarizes them. Among other things, financial experts identify and evaluate individual types of risk, after which a risk distribution diagram is developed. Individual project finance participants are assigned risks that they can most effectively take on (for example, an engineering company can most effectively control construction risks).

The reliability analysis of project participants covers their goals, responsibilities and experience.

The idea of increasing security in project finance lending is based on a professionally developed system of responsibilities for each of the participants, so a competent contractual structure is the basis for the success of the project.

Development of a loan agreement

Large loans in project finance mean high risk for capital providers.

Of course, the decision to issue such loans will be based on a number of analyzes and examinations, and is usually associated with tightening the terms of the loan (terms, debt repayment procedure, interest).

The bank’s conclusion on the possibility of providing credit funds can be made after a preliminary review of the project documentation.

The consent of creditors is expressed in the form of an official document that defines the main terms of the loan (Head of Terms), which contains the following:

• Loan amount.
• Loan maturity.
• Loan interest and bank charges.
• The procedure for transferring funds.
• Debt repayment procedure.
• Loan security (if applicable).

Head of Terms in the preparatory period helps to verify the assumptions of the feasibility study and the correct definition of the capital structure of the special project company.

Since the issuance of this document, the chances for the implementation of the project will increase many times over, and in the future this financial document becomes the basis for the development of a loan agreement.

From the sponsors’ point of view, preparation for financing a capital-intensive project begins with the hiring of a professional consultant who prepares a memorandum and a list of entities that can be invited to tender. The investment memorandum contains a detailed description of the company and its environment, a detailed financial model of the enterprise.

The so-called Term-sheet lays the foundation for future negotiations with creditors.

Loan agreements in project finance are very extensive and vary widely from bank to bank.

Therefore, the more accurate the request, the greater the influence of the company on the future loan agreement.

If the loan agreement will be based on international law, it is advisable to hire consultants who specialize in the law of the host country and at the same time have a local office. In the case of capital-intensive projects, when choosing banks for a financial consortium, it is worth choosing a bank that is well acquainted with local legal realities.

The second element in preparing for a project finance loan is the Mandate Letter.

This document includes, among other things, the following elements:

• Terms of the loan agreement specified in the Term-sheet.

• Mode of fulfillment of contractual obligations by the parties (best effort or underwritten).

• Duration of the agreement: the longer it is, the higher the chance of avoiding a situation in which the bank can initiate changes in terms.

• Exceptional clauses: for example, the so-called Market Adverse Change Clause allows the bank to withdraw from the contract in the event of a sudden change of market conditions, which is a highly unfavorable clause for project sponsors.

In the next step, the SPV signs a contract with a law firm.

The latter acts on behalf of the bank and carries out due diligence of the project (these services are paid for by the bank). Next, the company and its consultants, representatives of the bank and their lawyers enter into negotiations. The decisive moment is the signing of the loan agreement, which establishes the obligations of the participants until the project is finished and the loan is repaid.

A loan agreement in project finance and bank lending typically includes the following:

• Conditions for granting financing.

• Rules for repayment of the main part of the loan and interest payments.

• Financial conditions that the borrowing company undertakes to comply with.

• The method and frequency of the borrower’s reporting to the bank.

• Conditions that allow the bank to terminate agreements and demand immediate repayment of the loan or seizure of assets that were provided as collateral.

• Certificates, acts and statements that ensure the fulfillment of the contract.

An important part of the project finance and bank lending procedure is the development of loan security conditions.

In the case of project finance, securing a loan with SPV shares makes it possible to sell assets as soon as possible in the event of the borrower’s insolvency (project failure).

Project finance and bank lending is a fairly flexible and efficient tool that ensures the effective implementation of expensive and risky projects based on future financial flows.

This mechanism is quite developed, provided with a solid regulatory framework and is widely used in various industries around the world.

In project finance, we are dealing with a high flexibility of conditions, where the basis for minimizing risks is the cash flow (income) received from investments.

However, the lender does not completely abandon the traditional methods of securing a loan, such as bank guarantees and collateral.

Adequate cash flow and collateral allow banks to take on project risk.

If you are interested in long-term lending and project financing in the fields of energy, heavy industry, infrastructure, real estate, mining or processing of minerals, please contact the CP Finance UK

We provide a full range of project finance and bank lending services, including the establishment and management of SPV, financial modeling, project management, and a range of engineering and consulting services for large businesses.

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