Project Finance

The project finance services are described in greater detail below.

Raising project finance relies upon a detailed appreciation of all the factors that will impact upon the construction and operation of the infrastructure being created - the project. This includes competing projects in the future, changing patterns in demand for the outputs of the project, affordability and economic changes, changes in law and taxation, unforeseen and uncontrollable risks (force majeure), the political and regulatory environment, economic standing of the country where the project is located, geographic and market impacts on sponsors and financiers, environmental impact, technological changes and impacts on life cycle costing and operation.

Project finance requires fully developed contractual arrangements to be put in place prior to finance being released with many traps for the unwary or inexperienced.  Ideally, the contractual structure should allocate risks to that party best placed to manage the relevant risk on an economic basis, it being counter-productive to allocate a risk to a party who cannot manage that risk or can only do so at an unrealistic cost.  Sponsors, who will probably also become shareholders in a project company as described below, will be concerned to understand and control the recourse to themselves sought by lenders. Proper risk management by sponsors enables project development and investment to become a successful, sustainable business.

Sources of finance for projects are now very wide and all options should be considered and the right type and mix of finance tailored for the individual project.  Options include equity or loan finance from sponsors, investing institutions or funds, listing of equity in the project company on a stock exchange, bank debt, capital market debt and equity, securitisation of revenue streams, government grants, guarantees, credits and special finance facilities, export credit facilities both buyer and supplier credits, leasing, residual value guarantees and tax based consumer products.  This list whilst long is continually expanding and innovation is constant.  Which source is right for your project depends on many factors and Talanworth can guide you through the maze.

The finance plan must be realistic and achievable within an acceptable timeframe. Delays are commonplace and can cause recourse to the sponsors expanding out of control and / or incurring penalties from the parties to whom obligations are owed under the Project Documents.  Tailoring the right mix of sources of finance to the individual project, is critical to successful financial close.

The section below expands on some of the services and should assist potential clients to decide to what extent the necessary resources are available in-house and to what extent Talanworth is able to add value. References to the Client refer to the party who is controlling selection of project bidders.

1.    Analysis of key issues for the sponsors associated with the Project:

• Client / Ultimate users' objectives and preferences.  What economic benefits does the project create?  Who controls such benefits as these are crucial  to an understanding of project risk?

• Client risk profile: credit standing, political risk, legal risk (summary).

• Is the project governing contract styled as direct supply to Client or via (SPV) Special Purpose Vehicle entity established under BOT (Build Operate Transfer) or variations, PPP (Public Private Partnership), PFI (Private Finance Initiative). Specification or output based governing contract or other form?

• Responsibilities, risks and protections provided in the key contracts, and in particular force majeure consequences and cover.

• Performance levels, testing and acceptance. Conditions for Provisional & Final Take-Over.

• Key technical risks – new technology or known characteristics, shipping and installation, commissioning, insurability.

• Key suppliers of equipment, raw materials or other inputs, maintenance, ITC systems, software,

• Key service providers.

• Key advisers already identified: technical, economic, financial, legal accounting & taxation, insurance.  Assessment of need to bring additional resources on board.

• Project timetable, key milestones, start of construction / manufacture / operations / commercial service.

• Geographic locations involved and consequences.

• Governing law, regulations, consents and permissions required.

• Bankability review: will the contract / project be acceptable to lenders and what changes may be require?  Options to consider for managing financing risks.

2.   Mitigation and control of risk via a full understanding of the "Contractual Nexus": the interlinking of contract responsibilities that allocate obligations and risks amongst the participants: client, ultimate user or users, sponsors, investors, regulators, constructors, service suppliers, operator, lenders, advisers, special purpose companies, and other project participants.

3.     Working with the sponsors to ensure a fully resourced contract team able to manage both the construction and operation phases.

4.     Identification, selection, mandating and management of financial advisers, lead arrangers of finance sources, and their advisers - likely to include technical engineering and environmental advisers, insurance, revenue and/or traffic forecasters, market analysis, financial modelling and audit, taxation, accounting and legal advisers.  Financiers may build their own financial model or adapt and extend the client's financial model if made available to them.

5.      Working with the sponsors' own project team and advisers. Presentation of project in financially feasible terms to advisers and finance sources.

6.      Independent guidance to management about the financing proposals being offered and consequences for the project company and the shareholders.

7.      Oversight of financial sections of bidding and tender documents, review with ultimate client as required. Talanworth is experienced with negotiating tenders with a wide range of governmental and commercial clients.

8.      Oversight of sponsors' financial model and inputs into lenders’ financial model.  If required, Talanworth will work with its associates to produce a bespoke financial model for the Project.

9.      Negotiation support with ultimate client and its advisers about financial aspects of proposals in conjunction with Company and its advisers.

10. Negotiation support for the sponsors and project company and the advisers in relation to arranging finance, from heads of terms stage right through to financial close.

11. Training of sponsors' staff in the above procedures, best undertaken on the job, but guidance on main principles can be provided.  A training programme could be scoped and priced if required.

12. Talanworth can work with you to establish the project company for the project, often a newly formed SPV (special purpose vehicle) company.  You will also need to consider a Shareholders Agreement, likely to form one of the Project Documents, which will contain funding obligations for the SPV and may be charged to the lenders. The project company will require its own management, staff, premises (possibly) advisers and systems if not provided by one of the shareholders.  Talanworth has helped other clients set up suitable systems. Tax and accounting issues for the shareholders will be important as will treatment of the project company within the shareholders own Report & Accounts consistent with IAS or other applicable standards.

13. The construction period will require careful management of potential conflicts of interest, especially if one of the sponsors / shareholders are also responsible for construction and / or operation. It is essential that appropriate structures are put in place with the persons in charge having the right authority. Talanworth can help design such an organisation and the recruit suitable persons, either internally to the Company or from outside.

14. Compliance with lenders' requirements is critical during construction and systems need to be robust and capable of anticipating and controlling any adverse events. 

15. Commissioning is also a critical phase and will be watched keenly by lenders and their advisers. Revenues are only generated to repay debt once the project has entered into operation.  Successful operation maximises cash available for debt service and generates surpluses for dividends or loan repayments to sponsors / shareholders.

16. Post commissioning the sponsors may wish to sell equity to generate an uplift in returns. Talanworth can help the shareholders identify appropriate parties to organise such a sale.  Another common method for generating value is a refinancing and Talanworth is well-placed though its contacts to assist the shareholders achieve this objective.

17. Talanworth can also provide an independent view on operation and cash optimisation via its cash generation skill base either as a consultant or can sit on the Board of the project company as an non-executive director or as a director representing the interests of one or more of the shareholders.

18. Exit strategy.  Identify and agree at outset of project.  Talanworth can assist the Company with the implementation of the strategy but cannot itself market shares for sale and undertake other activities that are subject to the UK Financial Services and Markets Act 2000.

Contact us to arrange a meeting with Talanworth to explore our services further.

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