ServiceProject financing for medium and large investment projects
APEX offers:• Financing of investments from €50 million and more• Minimization of the project organiser’s contribution• Investment loans for up to 20 years• Credit guarantees
Sector Finance Apex (France) offers project financing for the implementation of large-scale investment projects in the energy sector, infrastructure, industry and other sectors of the economy.
✓ Project financing and investment consulting from APEX Investment Group:
• from €50 million and up;
• investments up to 90% of the project cost;
• loan repayment terms from 10 to 20 years;
To be considered for financing, we will send you a completed application form and a presentation of your project by email.
Learn more…Large investment projects, such as highways, gas terminals, or
Seaports are examples of projects characterised by long implementation periods and highly complex procedures. The lack of sufficient collateral means that financing them poses a high risk for banks. This risk also determines the high cost of financing. Given the experience of global crises, when making investment decisions, investors not only focus on profitability but are increasingly considering risk, understood as the likelihood of project failure and, consequently, the loss of invested funds. Project initiators also exercise caution when selecting potential investors and
financing methods for their investment projects. For investments in energy, heavy industry, and infrastructure, characterised by huge capital expenditures, this choice is crucial for the entire project.
To more accurately distribute broadly understood risks and increase investment potential, project finance (PF) and public-private partnerships are actively used today. Currently, project finance instruments are most applicable to large projects. Below, we’ll discuss the basic principles, types, advantages, participants, and application features of this flexible financing method. If you’d like to learn more about our services for financing large projects in Russia and the CIS, don’t hesitate to contact Apex’s financial team at any time. Our specialists are ready to provide you with a detailed financial consultation.
What is project financing?
Project finance is defined as a method of financing large investment projects requiring significant capital expenditures. Other definitions can be found in international literature, as authors debate whether project finance is a method, formula, technique, concept, or form of financing. This method was known as far back as Ancient Greece, where it was used to finance long-distance trade expeditions. Project finance was popular in the 19th and 20th centuries. In the United States, it supported the extraction of natural resources, beginning with crude oil and later other valuable energy resources. This method, among other things, was used to build the largest railroads in the United States, the Suez and Panama Canals, the London Underground, Athens Airport, and prisons in the United Kingdom. The term ”
project finance ” has not yet found an equivalent in most European languages. This is due to a lack of awareness of project financing through this innovative instrument. Therefore, in the literature, you can find translations such as ”
investment project financing ” and ”
structured finance. The latter best describes the essence of project finance.
Table: Key characteristics of project finance.
| Characteristics | Brief description |
| Creating an SPV | Financing is attracted by a special project company, which is an independent legal entity and created specifically for the implementation of a specific project with a defined life cycle. |
| Project participants | The SPV consists of respected and mature participants with a certain authority in the industry and the ability to provide guarantees for the successful implementation of the project. |
| Financial leverage | High leverage and allocation of funds to a legal entity without sufficient assets is most suitable for capital-intensive long-term projects. |
| No regression | The pension fund provides limited recourse to the borrower, as the SPV will be fully liable for the financial obligations of the project. The initiating companies do not risk their assets in the event of failure. |
| Self-financing | A self-financing project means repaying its obligations solely with funds generated by the project. The technical, functional, and financial parameters of such a project are planned so that its operation will subsequently allow it to repay its debt obligations. |
| Risk sharing | The investment project must meet market demands. The risk distribution established by contractual relationships optimally matches the needs of the participants. |
| Life cycle | A defined (limited) period of the project means that the obligations must be repaid within this period. |
| New projects | Project finance is used to finance new projects rather than existing investments, although projects can be refinanced with project finance. These are often international projects. |
The growing popularity of investment project financing with a Pension Fund is explained by its numerous advantages. First and foremost, it offers strict risk diversification among all project participants. A characteristic feature of project financing is that financial institutions (e.g., banks) assume a significant portion of the project risk. It is important to identify risks as accurately as possible and select participants who can control them to the greatest possible extent. More flexible project financing terms can be negotiated with lenders. Repayment terms, interest rates, or payment schedules for subsequent tranches, collateral for loans and borrowings, and the repayment procedure are also discussed in detail with lenders.
Another advantage of a Pension Fund is off-balance sheet debt. Sponsors initiating a project separate their assets into a special purpose vehicle (SPV), whose purpose is
to attract external capital and implement the project. This does not obligate project initiators to reflect project debt in their financial statements. Off-balance sheet financing allows SPVs to obtain higher loans than the project initiator would otherwise, by avoiding many of the legal restrictions inherent in loan agreements. Due to the off-balance sheet nature of the debt, the bankruptcy of the project company does not necessarily mean the bankruptcy of the project initiators. Project financing also has its drawbacks. It is the most labour-intensive method of financing investment projects. This is due to the organisational structure, which involves numerous parties bound by numerous agreements and contracts, increasing the time and duration of negotiations. The cost of project financing is relatively high. Commercial banks are often sceptical of SPVs, which is due to the lack of an adequate methodology for assessing project-based risks. Additionally, it is necessary to attract a large number of participants, including experienced management personnel, financial advisors, and experts, and to analyse the profitability of a project with high costs. Lenders assume greater risk and therefore expect a higher rate of return.
Despite the above-mentioned disadvantages, project financing represents virtually the only option for implementing large projects with limited assets. APEX’s finance team will help you weigh the advantages and disadvantages of each financial model, choosing the best path for your business.
Participants in project financing
Organising an investment project financed using project finance is highly complex and requires precise logistics and coordination of tasks. Because each investment project is unique, its participants may perform multiple roles; for example, a company may be both a lender and a service recipient.
The final participants in project financing are the recipients. Each investment project depends on the demand for the proposed product or service (for example, waste recycling or electricity supply).In projects financed by this method, demand is paramount, as lenders and sponsors determine their investments based on projected future cash flows. If the project financing scheme is considered more broadly, including external stakeholders and companies, the list of participants becomes much longer. This may include operating companies, rating agencies, logistics firms, legal consultants, etc.
Table: Project financing participants and their brief characteristics.
| Participants | Potential financial advisors include government and commercial banks, financial analysts preparing sensitivity analyses, accounting firms handling international projects, law firms, brokers, and others. These project finance participants can eliminate potential obstacles to organising the financing process and assist sponsors in raising funds. |
| Sponsor | Investors’ role is to provide capital to finance investments, whether through equity, intermediary, or debt. Investors expect a return on their investment through income from the cash flow generated by the project or through an increase in the value of the acquired financial instruments and their sale. The investor’s goal is to oversee the project, coordinate its development and operations, and optimise taxation. Investors may also act as sponsors. |
| Investors (capital providers) | Investors’ role is to provide capital to finance investments, whether through equity, intermediary, or debt. Investors expect a return on their investment through income from the cash flow generated by the project or through an increase in the value of the acquired financial instruments and their sale. The investor’s goal is to oversee the project, coordinate its development and operations, and optimise taxation. Investors may also act as sponsors. |
| Financial consultants | Project finance organisation includes developing and negotiating terms, signing agreements, conducting negotiations, engineering work, financial modelling, coordinating international financing, etc. The organiser may also be responsible for relations with financial agencies. |
| Organizers of financing | If the project financing structure includes leasing instruments, the lessor plays a significant role. Particular attention should be paid to taxation issues and potential risks that could jeopardise the term of the agreement. The lessor’s goal is a high profit margin. |
| International financial institutions | Financial agencies and IFIs can participate in the project on a co-financing basis. They can also provide political risk insurance and support large-scale investment projects in developing countries. |
| Agent | In some cases, a separate company (agent) is responsible for managing the documentation and bank accounts associated with the project. This custodian agent may also be the financing arranger or one of the participants in the syndicated financing. |
| Lessor | Preparing project finance documentation requires specialised legal knowledge and an understanding of how risks are allocated between project participants through various legal documents. Project finance is often used for international investments, so the involvement of international legal counsel is highly recommended for such projects. |
| Independent experts | Sponsors are required to conduct professional studies, which typically require the involvement of independent experts. This may include feasibility studies, market research, environmental studies, and so on. |
| Legal consultants | An operator company manages all infrastructure created within a specific investment project. The operator may be an organisation affiliated with the project sponsor or a subsidiary of the sponsor. This arrangement provides the sponsor with the most complete control over the project’s implementation and ensures that the operator’s actions are consistent with the sponsor’s goals. |
| Host Government | The state (a relevant ministry, agency, or state-owned enterprise) can also participate in project financing. This can include direct participation or concessionary instruments. Some projects are governed by special regulations, including international ones, that require direct state participation. |
| Construction (engineering) company, contractor | Turnkey construction of a facility is typically carried out by a general contractor under an EPC contract. Under the EPC system, the general contractor is fully responsible for engineering, equipment procurement and setup, construction, configuration, and commissioning of the facility. |
| Operator | A project may have one or many recipients of its products (services). The recipient’s technical and strategic dependency on the product should be analysed in terms of the loan repayment period and the entire life of the project. Recipients will depend on supply reliability, long-term savings, and competitive advantages in the marketplace. |
| Insurer | Project financing will require insurance. Insurance packages for project implementation and operation (start-up delay insurance, civil liability insurance, environmental pollution insurance, etc.) require analysis in the context of costs and the reliability of the insurer. |
| Suppliers of equipment and materials | Materials and equipment may be supplied under separate supply contracts. In this context, it is necessary to assess the suppliers’ capabilities to ensure their ability to ensure delivery throughout the entire construction period. |
| Recipients | A project may have one or many recipients of its products (services). The recipient’s technical and strategic dependency on the product should be analyzed in terms of the loan repayment period and the entire life of the project. Recipients will depend on supply reliability, long-term savings, and competitive advantages in the marketplace. |
| Transport and energy companies | Effective logistics solutions significantly increase the value of a project for recipients and make construction and operation processes more reliable. In addition to standard transportation, this also applies to pipelines, power lines, and other infrastructure. |
| International rating agencies | A rating agency evaluates sponsors’ ability to structure project financing. Advance knowledge of the agency’s criteria is essential for preparing the SPV and project participants. Rating agencies profit from conducting rating reviews, which brings them prestige. |
Stages and terms of project financing: the investment process
Project finance is a broad and multifaceted concept. The specific financing method will determine the course of action for participants throughout all stages of the investment project lifecycle. The project finance cycle is a three-stage process similar to a standard investment process, including pre-investment, investment, and operational phases. The first, pre-investment stage, is concerned with the preparation and provision of financing. The project finance preparation schedule consists of nine stages, as presented in the table below. The table also includes timelines for individual stages, which, if planned, can be shorter. However, preparing a large investment project currently takes from 9 to 12 months to 2 years or more. If the government and international financial institutions are involved in the project finance scheme, the process can take significantly longer.
Table: Stages and Timelines for Organising Project Finance.
| Item No. | Stage name | Term |
| 1 | Market identification and assessment | 4-6 months |
| 2 | Technical (engineering) research | 6-12 months |
| 3 | Financial and economic research | 4-6 months |
| 4 | Preparing a letter of intent | 2-8 months |
| 5 | Obtaining official permits | 2-3 months |
| 6 | Creation of a consortium | 3-6 months |
| 7 | Preparation of design documentation | 4-18 months |
| 8 | Financial closure of the transaction | 1-2 months |
| 9 | Project management | Continuously |
It should be noted that all project financing timelines listed are indicative and can vary widely depending on the country, industry, and specific project. For example, obtaining official permits and licensing in developing countries typically presents significant challenges, especially when it comes to mineral extraction and processing and environmentally hazardous projects. Factors such as corruption, bureaucracy, and inadequate legislation can significantly impact project timelines.
Search for investment projects.
The path to project financing begins with potential investors identifying and selecting the most promising projects. Investors are constantly searching for projects and receiving information about potential projects from sponsors seeking funding. Mature institutional investors have teams within their organisations that professionally evaluate investment opportunities. These teams are capable of sifting through hundreds of projects within a month.
Selected projects undergo further comprehensive analysis. During the technical and financial analysis stages, the project pool is significantly narrowed. A set of engineering decisions determining capital expenditures and operating costs, along with economic efficiency parameters and other project selection criteria, leads to the selection of the optimal project or project variant. Typically, an investment recommendation is based on an analysis that assumes the necessary financing. The project is then broken down into several variants and analysed in terms of how much and what kind of capital can be attracted for the project, as well as the distribution of risk and responsibility among the participants.
Raising funding
Attracting investors to
Financing a major project typically takes the form of a letter of intent outlining the specific financing structure. Before signing agreements within the financing arrangement, proposals will be subject to a comprehensive professional evaluation. The selected company representative will then proceed to prepare project documentation. This documentation will include, in addition to technical and financial analyses, the preparation of an information memorandum and obtaining the necessary permits. Financial closing is associated with a specific credit process.
Financing, on the other hand, is provided in stages, under strict bank supervision. In some cases, all funds may be made available to the investor at once, but financing is typically provided in several tranches, requiring the fulfilment of certain conditions and the achievement of milestones.
Project implementation from idea to ready-made business
Typically, during the implementation phase of an investment project, interest on the loan received is capitalised, as the project does not yet generate surpluses. The investment funds may include fees and expenses associated with transaction preparation. The invested capital is typically not repaid, although previously incurred debt may be included. Alternatively, the project loan may be refinanced at the project completion stage. Cooperation with the lender concludes with the commissioning of the facility. The parties must confirm that the project was completed on time, within the specified budget, and is capable of generating profits in accordance with previous forecasts. Until this is confirmed, the borrower will bear the costs associated with the delay and the project’s failure to fully meet the agreed-upon specifications. Once the project’s implementation is confirmed positively, the project takes the form of pure project financing. During the operational phase, the project’s cash flows serve as the sole source of loan repayment. Completion of the investment process in project financing is associated with the full expiration of the terms specified in the SPV’s charter. In this context, early termination of the project by contract termination is also possible in the event of critical breaches of the agreement’s terms.
Capital structure in project finance
Sources of funding for project finance are relatively limited. New companies created to implement an investment project face difficulties in obtaining a credit rating for a successful securities issue on the capital market. Access to the capital market can be achieved by attracting reliable partners with high creditworthiness and ensuring their participation at all stages of the project’s implementation. The main sources of capital in project finance are equity, subordinated, and debt, each with its own advantages and limitations in practical use. The specific risk and expected return of a specific project are related to the capital structure used. The capital of a special purpose vehicle (SPV) consists of funds contributed by all participants who are in some way associated with the project and contribute to its implementation. In this context, it is difficult to speak of “pure” equity or external capital.
Equity
Equity contributed by a company’s shareholders often forms the basis for further project financing.
Equity is risk capital, serving as a safety net for lenders. The level of equity in project financing must be balanced, as a high proportion of loan commitments in cash flow can hinder debt repayment. The optimal share of equity, determined based on the project’s profitability and the assessed risk, should ensure unimpeded debt servicing. A significant share of equity guarantees shareholder involvement, motivation, and interest in the project. Typically, the share of equity in total capital expenditures ranges from 10% to 50%.ESFC Investment Group offers its clients financing of up to 90% of a project’s investment costs, which means minimal financial participation from the initiators.
Subordinated capital
The main feature of subordinated capital is its contractual subordination to the repayment of the principal debt. This type of capital may apply to shareholders, construction contractors, future partners, commercial banks, or other investment-related entities. Subordinated capital providers are called “cash flow lenders,” and the sole source of debt repayment is the cash flow generated by the project, reduced by the repayment of the principal obligations. Examples of this type of financing include preferred shares and subordinated loans. Subordinated capital can enhance a project’s creditworthiness, as it can be considered equity for the purposes of calculating debt ratios. It is a more flexible instrument than equity or debt alone.
A type of indirect project financing is ” mezzanine financing .”This is a type of debt capital (a form of subordinated loan) that is associated with high risk. The issuance of debt securities, characteristic of this type of financing, is usually combined with an option to convert into shares or an additional right to purchase shares, a so-called warrant.
Borrowed capital
The share of debt (so-called senior debt) in project financing can range from 50% to 90%. This is the preferred capital relative to all other commercial liabilities of the company.
Large projects are typically financed by a group of lenders, either as part of a consortium or independently from multiple sources. Insurance companies and pension funds often provide long-term financing of up to 20 years, while most commercial banks offer loans for an average of 10-15 years.ESFC Investment Group offers financing of €10 million or more over a long term, depending on the financial needs of the specific project. Contact our representatives to learn more.
Risk management in project finance
The problem of classifying and allocating risks in project finance is complex. Currently, there is no single, universal risk allocation scheme. Most commonly, groups such as economic risk, technical risk, and other risks are distinguished. A project finance project (PF) assumes an optimal distribution of risks among participants to ensure the most effective and secure implementation of the investment project. Economic risks, including market risks and risks related to funding sources, collateral, and management risks, play a significant role. The risk of funding sources refers to the inability to obtain the funds necessary for project implementation. It is important to minimise this risk, so project initiators seek certain guarantees and commitments from project participants and independent insurance and financial institutions. An investment feasibility assessment should include a detailed identification and analysis of risks.
The risk of funding sources can be mitigated through a thorough assessment of the investors’ financial position. This is typical for PF projects. Another way to minimise this risk is to enter into binding agreements (guarantees) with future investors at the pre-investment stage. For example, obtaining a bank guarantee for the full loan amount and adjusting the loan repayment according to the capabilities of the investment project. Along with the risk of funding sources, it’s worth mentioning financial risk, which is associated with macroeconomic risk. These include exchange rate risk, interest rate risk, and inflation risk. Hedging instruments for this risk include forward and futures contracts, interest rate swaps and interest rate caps, an indexed food price system, and government guarantees. Also worth mentioning is the possibility of refinancing risk, i.e., early repayment of the debt. Banks protect against this by setting high fees for early loan repayment. Collateral risk is a typical credit risk. In the case of investments financed by a pension fund, the emphasis is on the project’s ability to repay the debt from projected financial surpluses, rather than on the value of the project initiators’ assets. Although the basis for providing a loan is the SPV’s valuation, its assets are a secondary element of collateral and are usually insufficient in value to cover the bank’s obligations. This is due not only to
the project’s financing formula but also to the impossibility of liquidating the assets and their high specialisation (suitability for specific purposes). Collateral risk occurs when the actual value of the project’s assets is less than the financing provided, and investors have concerns about its future value. There are tangible assets that are easier to liquidate, such as equipment, machinery, fuel, raw materials, and cash. However, if a project fails, its assets are practically worthless. A decrease in the value of project assets can be caused by economic conditions (changes in economic indicators such as GDP, consumption, unemployment, and inflation) or instability in commercial law. To mitigate this risk, project participants can engage the services of a reputable law firm to properly draft contracts. Adequate valuation of collateral is an important risk mitigation tool. This applies to other securities, such as participant guarantees and insurance premiums. The final type of economic risk is management risk. The main causes of this risk include poor work organisation and production processes, low project management qualifications, low operational efficiency, cultural or communication barriers, improper equipment operation, and improper storage of raw materials and supplies. These factors contribute to reduced production, decreased quality of products or services, construction interruptions, and increased operating costs, which, in turn, cause financial difficulties.
Mitigating this risk involves monitoring financial statements and preparing relevant investment project documentation. Selecting the right operator is also crucial. Lenders, when investing in a start-up, often place the greatest emphasis on the qualifications and achievements of management personnel. Consequently, they pay close attention to the selection of an operator, which should have staff with extensive knowledge and experience managing similar projects. It’s also advisable to conduct a local labour market analysis to determine the qualifications of potential employees. This allows for the preparation and implementation of a training program in advance that will enhance the skills of future employees and thereby reduce the management risks of the investment project. Furthermore, insurance for machinery and equipment, which covers lost profits due to equipment breakdowns, will mitigate other project risks. Banks may also require sponsors to establish a special fund to collect all financial surpluses generated by the project. This fund should guarantee debt repayment and also motivate sponsors to manage the company as efficiently as possible.
Project financing for large investment projects
A distinctive feature of project finance is the method of raising funds. While in the case of a classic bank loan, the borrower’s credibility and ability to service the debt are decisive for its provision, the decision to provide project finance is determined by an analysis of the profitability of potential investments, depending on their future income. In other words, the pension fund debt is repaid solely from the cash flows generated by the project.
Lenders rely on future cash flows, not the value of the project initiator’s assets . Compared to a loan, project finance offers much greater flexibility, as the debt repayment terms and payment amounts are strictly aligned with the cash flow structure of the investment project. For example, payments can be deferred, and payment amounts can vary over time. In the case of a conventional loan, the repayment terms are fixed, and payments are uniform ( annuity model ).
A key feature of project finance is the existence of an independent legal entity, separate from the structures of the investment project initiators. A company is created to implement a specific project for a specific period of time; it is a
special-purpose vehicle (SPV ). After the investment project is completed and the debt is repaid, this company is typically liquidated. Project sponsors are its initiators, who, as the beneficiaries of the investment, have the greatest interest in the project’s implementation. Sponsors create the SPV, are responsible for contributing share capital, and have the experience necessary for project implementation. Sponsors are also responsible for project planning, cooperation with other organisations, and the precise implementation of the developed financing model, which ensures the SPV’s creditworthiness. There are many advantages to using an SPV, which are achieved by separating the project from the initiator’s assets. The cash flows required to implement a major investment project are not linked to flows from other investments. Therefore, project financing does not depend on the financial health of individual project participants. The SPV is a separate legal entity, so the initiators do not bear full responsibility for the project’s risk with their own assets. From this perspective, investments financed through a PF are off-balance sheet.
Using an SPV means that project initiators can receive more investment than they would with individual external financing. In the event of bankruptcy, bankruptcy proceedings are carried out against the project company, not against individual project participants. In the event of project failure, the off-balance sheet nature of project finance debt protects the initiators from bankruptcy. However, to maximise protection against default on debt servicing, creditors have the right to demand partial repayment from the participants. In project finance, risk sharing between the participants is part of the agreement between the initiators. This means that each party assumes only an acceptable level of risk. To minimise their risk, initiators and creditors may delegate relevant activities to third parties.
General contractors in project finance are responsible for planning, engineering, and construction. They provide the funds necessary for the launch and implementation of the project. Contractors typically include large companies specialising in specific energy, industrial, infrastructure, or other projects, with specialised equipment and qualified personnel (construction concerns). The sponsors are often the implementers.
A contractor who offers project financing becomes more attractive among other potential contractors. The initial project initiators may also be involved as contractors. These participants make every effort to minimise the risk of project failure. Contractors must provide a guarantee that the investment project will be implemented in a specific form, on time, and at a reasonable cost. Government agencies also often participate in project financing, creating a favourable legal and economic environment for the implementation of large investment projects.
The quality of this environment determines the profitability and success of the investment. To begin project implementation, various types of permits and licenses issued by government agencies are required. A key factor influencing an investment project is the tax policy of a given country. Labour and environmental regulations are also important in this regard. By creating the appropriate conditions and supporting investments, the state becomes an active participant in the project. Despite many advantages, implementing large investment projects with the help of a pension fund has some disadvantages. First of all, the preparatory phase of a project is expensive, with particularly high costs associated with conducting the necessary analyses (financial, tax, and legal). The planning process is particularly complex. Setting up a pension fund and the need to negotiate terms and conditions lead to additional costs, are time-consuming, and create the risk of conflict between the parties.
APEX, an international investment and consulting firm, has experience financing large-scale projects. With our professional assistance, you’ll have a reliable partner and consultant.