Project financing is financing and repayment of long term infrastructure and industrial project loans based on the cash flows of the project, rather than the balance sheets of its sponsors or project owners. Project financing loans are usually non-recourse and are secured by the project assets and amortized from the project cash flows. Project lenders are given lien to the assets of the project being financed and assume control of the project if the project owner/company has difficulty in complying with the loan terms.
Risk identification and allocation is key to project financing and owing to a number of technical, environmental, political, economic risk inherent in developing countries and emerging markets and/or projects with high business leverage, funding sources, technology owners, equipment developers prefer to fund and/or build projects against bankable collateral and therefore may require limited recourse financing secured by the surety of the sponsors or the project owners.
The surety can be provided through properly engineered bankable collateral instruments. Bankable collateral service includes but not limited to Bank Guarantee, a Standby Letter of Credit or a Blocked Fund Confirmation. It also includes activation of dormant asset, and the structure of an unencumbered cash backed, new issue SBLC, or Bank Guarantee. With these instruments, a new door to avail funds for investment, project funding or business finance, is opened. This bankable collateral can be structured based either, on your own cash, assets, and equity or on collateral lending (3rd Party Collateral). Contract terms could be 1 to 5 years or more. Transaction is usually transmitted via verbiage of the bank instrument in line with standard text formats, banking protocols and financial standards.
In structuring bankable collateral, you need to consider if you:
- Can back up the BG with your own cash?
- Can pay an eventual claim yourself?
- Can prove that you have the annual collateral lending and instrument fee and leasing fee, if the service is provided by a third party
- Have a funding bank ready to provide you with cash against a Bank Guarantee
- Need a Pre-Advice to trigger a firm commitment from your funding bank to fund against the instrument
- Have sufficient cash funds, to pay for the bank fees to perform these services.
Apart from project financing, such financial engineered instrument can be used for gold, crude oil, construction, real estate and property development transactions. It can serve as general credit enhancement for loans and credit line security. It can as well be used as performance-, bid-, or surety bond and tender guarantee.
The Guarantee bond is a credit enhancement for loans, where the borrower or project owner does not have sufficient collateral to have a willing bank or funder fund a project. Cash funds can be drawn from the Guarantee Bond, but in line with the terms of the loan agreement.
Depending on the transaction, a Pre-Advice is issued via SWIFT and a hard copy of the instrument can be arranged and delivered via bonded bank courier.
SWIFT stands for “Society of Worldwide Interbank Financial Telecommunication” It provides a network to allow financial and non-financial institutions to transfer financial transactions through a ‘financial message.’ It consists of 5 blocks. The first two letters (MT) stand for ‘Message type and are crucial to identifying content. The first number, after the MT, stands for “message category.” For example, the first number, ‘0’ stands for system messages, and substituting, ‘1’ for customer payments and cheques, ‘2’ for financial institution transfer, ‘3’ for treasury markets, ‘4’ for collection and cash letters, ‘5’ for security markets, ‘6’ for security market – metals and syndication, ‘7’ stands for documentary credits and guarantees., 8 for travelers cheque and 9 for cash management and customer status.
These instruments can be monetized as well. Especially bankable collaterals linked to large project (Projects in Pre-operation stages – Greenfield or Operation stage – Brownfield) funding. The bankable collateral for monetization, could be valid Commercial Bank Instruments, Bank Guarantees, Bonds, Medium Term Notes, and other Bank Debt Instruments issued by banks rated “BB+” or better, Sovereign Guarantees, Resource Guarantees, Oil Guarantees or similar resource guarantees, Bank Promissory Notes, Corporate Promissory Notes endorsed by a commercial bank, etc. The service is suitable for projects like airports, bridges, energy, hospitals, roads, highways, schools, sea ports; etc. Projects can be Build Own Operate Transfer (BOOT), Build Own Operate (BOO), Build Own Transfer (BOT), Build Transfer Own (BTO), Build Transfer (BT), Build Lease Transfer (BLT), Build Rent Transfer (BRT), Public Private Partnership (PPP), etc. The monetizing process is conducted by top level Legal-, Banking- and Consulting Professionals involving major international firms and has loan to value of up to 100%.