RAISING PROJECT FINANCE
Subcontracts India provides project owners /
sponsors / promoters a much needed project financing gateway to investors and
financiers. Our project financing services are particularly beneficial to
shovel ready or green shoot projects. We have the means as well as
expertise to approach numerous Banks, Investment Bankers, Non Banking Finance Companies (NBFCs),
Financial Institutions (FIs), Venture Capitalists (VCs), Private Equity
Investors (PE), Ultra High Net Worth Individuals (UHNWIs), Family
Businesses, Hedge Funds, Pension Funds, Underwriters, etc. with great speed and
efficiency. We understand how these fund providers and investors work and what
are their main areas of interest. Targeting the right source is not just
important but also crucial for successful financial closure.
Subcontracts India offers:
1. Identification of projects with a Cash Flows Generating
component and bankability potential;
2. Support of project development to achieve bankability;
3. Preparation and structure of transaction by leveraging our
consulting, financial and legal expertise;
4. Finding the right investor and achieving financial close;
5. Support to the client through the project execution and
construction phases.
We can be present with our services across the entire project lifecycle:
Strategy and planning: Assisting long-term planning of individual projects
or a portfolio by focusing on feasibility, alignment with corporate objectives
and governance procedures in order to maximize return on investment.
Financing and procurement: Raising project finance; establishing and managing
the procurement process to acquire services, material or equipment to deliver
the project, and prioritizing capital allocation between projects.
Project organization, execution and construction: Setting up the project for success and
strengthening client capabilities to deliver on time and to budget.
Operations and maintenance: Assessing ongoing lifecycle costs and
providing insights around optimizing the performance and value of assets in
operation.
Asset recycling, concession maturity & decommissioning: Determining when and how to discontinue
investing in an asset, and transaction advisory services for investors in
infrastructure assets.
The key reasons for the
underdevelopment of project financing lie in insufficient project maturity and
inability to develop projects to the level necessary to achieve bankability.
Access to finance is one of the main reasons that infrastructure projects are
not developing faster and the key stakeholders sometimes do not see a business
case for financing. Moreover, lack of know-how and competence of key
stakeholders require a complex multidisciplinary approach in order to guarantee
project execution.
Projects, however, are
funded solely on their merits. Although we do not make claims of 100% success
rate in our pursuit of project finance, with our expertise and
experience, our clients enjoy a definite advantage in terms of
getting their projects successfully funded. The following are extremely
important for achieving successful financial closure.
Business Plan & Pitch
Deck
We have been
consistently endeavoring to simplify the process of raising Project Finance
for the project promoters and owners across the world. While discussing
Project Finance, the significance of submitting a concise yet profoundly
informative Project Proposal or Business Plan cannot be overestimated. Fund
Providers as well as investors want to see a business plan that is short enough
to engage investor interest and yet long enough to cover all vital
project information.
We realize that it is
not easy to put a winning Business Plan in place unless the Business Plan
writer has been thoroughly acquainted with the project right from its inception.
There are numerous consultants who would accept any Business Plan
compiled by anyone. However, we generally do not. Project Finance is a
challenging task and our experts would like to do it in a highly evolved
manner so that chances of successful financial closure is extremely high.
We accept a Business Plans compiled by either a competent project management
team or a professional financial services provider with history of handling
financial modeling for projects. Financial modeling combines accounting,
finance, and business metrics to create an abstract representation of a company
in Excel and has a wide range of uses, including making business decisions
at a company, making investments in a private or public company, pricing
securities, or undergoing a corporate transaction such as a merger,
acquisition, divestiture, or capital raise.
We also need a Pitch
Deck. A pitch deck is a brief presentation, often created using
PowerPoint, Keynote or Prezi, used to provide your audience with a quick
overview of your business plan with visual enhancements such as graphs,
charts, and pictures. You will usually use your
pitch deck during face-to-face or online meetings with potential
investors, customers, partners, and co-founders.
Financial Modeling
Financial modeling,
often considered synonymous to financial statement forecasting, is an effective
tool for providing a clear picture of the forecasted financial performance of a
company. The process results in the construction of a mathematical model that
assists in firm’s decision making as well as financial statement
analysis. The importance of financial modeling is mainly rooted in its
capability to enable better financial decisions within a firm. It is widely
used by organizations for the purpose of future planning. By simulating the
impact of important variables, financial modeling allows for scenario
preparation so that organization knows its course of action in various
situations that may arise.
Financial modeling also plays an important role in capital budgeting. Not only
does it make financial statement analysis and resource allotment for
the next big investment easier, but it also helps in determining the cost of
capital. It provides a thorough analysis of debt/equity structure for this
purpose, along with the returns expected by investors.
We realize forecasting a
company’s operations into the future can be very complex since each business is
unique and requires a very specific set of assumptions and calculations. We
will then focus on the following:
1. Historical data – input at least 3 years of historical
financial information for the business.
2. Ratios & metrics – calculate the historical
ratios/metrics for the business, such as margins, growth rates, asset turnover
ratio, inventory changes, etc.
3. Assumptions – continue building the ratios and metrics
into the future by making assumptions about what future margins, growth rates,
asset turnover, and inventory changes will be going forward.
4. Forecast – forecast the income statement, balance
sheet, and cash flow statement into the future by reversing all the
calculations you used to calculate historical ratios & metrics. In
other words, use the assumptions that you made to fill in the financial
statements.
5. Valuation – after the forecast is built, the company
can be valued using the Discounted Cash Flow (DCF) analysis method.
Structuring
The structuring of project financing is a framework in which ownership
structure, project structure, risk structure, and financial structure decisions
are made and tied together in the project's legal structure which, in turn,
forms a foundation for funding the project on a limited recourse basis. The
ownership structure is how the special purpose company/vehicle (SPC/SPV) is
organized; that is, as a corporation, unincorporated joint venture, limited
liability partnership, etc. Project structure on the other hand refers to the
agreements defining responsibilities and transfer of rights and/or ownership of
the SPC/SPV such as build, operate, and transfer of ownership (BOT), build,
own, operate, and transfer (BOOT), build, lease, and transfer (BLT), etc.
Risk structure is the prioritization and mitigation of risks after the
identification, assessment, and allocation process is completed. The project's
legal structure is the web of contracts and agreements negotiated to make
financing possible. Financial structure refers to the mix of financing used to
fund a project, which includes equity, short‐ and long‐term loans, bonds, trade credits, etc. and the cash flows to equity
providers and the lenders.
A special purpose vehicle (SPV) project company with no previous business or
record is necessary for project financing. The company’s sole activity is
carrying out the project by subcontracting most aspects through construction
contract and operations contract. Because there is no revenue stream during the
construction phase of new-build projects, debt service is possible during the
operations phase only. For this reason, parties take significant risks during
the construction phase. Sole revenue stream is most likely under an off-take or
power purchase agreement. Because there is limited or no recourse to the
project’s sponsors, company shareholders are typically liable up to the extent
of their shareholdings. The project remains off-balance-sheet for the sponsors
and for the government.)
Realizing Benefits Of Project Finance
Financing projects
through the project finance route offers various benefits such as the
opportunity for risk sharing, extending the debt capacity, the release of free
cash flows, and maintaining a competitive advantage in a competitive market.
Project finance is a useful tool for companies that wish to avoid the issuance
of a corporate repayment guarantee, thus preferring to finance the project in
an off-balance sheet manner. The project finance route permits the sponsor to
extend their debt capacity by enabling the sponsor to finance the project on
someone's credit, which could be the purchaser of the project’s outputs.
Sponsors can raise funding for the project based simply on the contractual
commitments.
Project finance also permits the sponsors to share the project risks with other
stakeholders. The basic structure of project finance demands that the sponsors
spread the risks through a network of security arrangements, contractual
agreements, and other supplemental credit support to other financially capable
parties willing to assume the risks. This helps in reducing the risk exposure
of the project company.
The project finance route empowers the providers of funds to decide how to
manage the free cash flow that is left over after paying the operational and
maintenance expenses and other statutory payments. In traditional corporate
forms of organization, corporate management decides on how to use the free cash
flow — whether to invest in new projects or to pay dividends to the
shareholders. Similarly, as the capital is returned to the funding agencies,
particularly investors, they can decide for themselves how to reinvest it. As
the project company has a finite life and its business is confined to the
project only, there are no conflicts of interest between investors and the
management of the company, as often happens in the case of traditional
corporate forms of organization.
Financing projects through the project finance route may enable the sponsors to
maintain the confidentiality of valuable information about the project and
maintain a competitive advantage. This is a benefit of raising equity finance
for the project (however, this advantage is quite limited when seeking capital
market financing (project bonds). Where equity funds are to be raised (or sold
at a later time so as to recycle capital) through market routes (for example,
Initial Public Offerings [IPOs]), the project-related information needs to be
shared with the capital market, which may include competitors of the project
company/sponsors. In the project finance route, the sponsors can share the
information with a small group of investors and negotiate the price without
revealing proprietary information to the general public. And, since the
investors will have a financial stake in the project, it is also in their
interest to maintain confidentiality.
In spite of these advantages, project finance is quite complex and costly to
assemble. The cost of capital arranged through this route is high in comparison
with capital arranged through conventional routes. The complexity of project
finance deals is due to the need to structure a set of contracts that must be
negotiated by all of the parties to the project. This also leads to higher
transaction costs on account of the legal expenses involved in designing the
project structure, dealing with project-related tax and legal issues, and the
preparation of necessary project ownership, loan documentation, and other
contracts.
Understanding The Dynamics Of Project Financing
From a broad
perspective and general analysis, the financial viability (or commercial
feasibility) of the project is assessed by determining whether the net present
value (NPV) is positive. NPV will be positive if the expected present value of
the free cash flow is greater than the expected present value of the
construction costs. However, in addition to or in lieu of the NPV, lenders will
use debt ratios such as the Debt Service Cover Ratio (DSCR) and Life Loan Cover
Ratio (LLCR) as the main ratios to measure bankability.
The DSCR measures the protection of each year’s debt service by comparing the
free cash flow (more precisely, the cash flow available for debt service –
CFADS) to the debt service requirement. The DSCR requires that the cash flow
available for debt service is at least a specified ratio (for example, 1.2
times) of the scheduled debt service for the relevant year. The LLCR compares
the overall amount of free cash flow projected for the life of the loan, duly
discounted with the amount of debt under analysis. The LLCR also reflects the
capacity of the SPV to meet the debt obligations over the life of the loan
(considering potential re-structuring).
On the basis of the projected cash flows of the SPV, including the debt profile
under analysis, lenders and their due diligence advisors will observe the value
of such ratios, and accommodate the debt amount so as to meet them, considering
the maximum term at which they are ready to lend. Subsequently, they will run
sensitivities analysis (including break-even analysis) on the project cash
flows to test the resistance of the project to adverse conditions or adverse
movements of the free cash flow figures from the base case.
In determining financial viability, and related to the reliability of cash
flows and the guarantees offered by the contract (especially termination
provisions), the lenders will analyze the risk structure of the contract. This
will include determining how achievable the performance standards in
government-pays projects, or the contractual guarantees in user-pays projects,
actually are. Lenders will exercise tight control of all cash flows, limiting
the ability of the private partner to dispose of them — through “covenants”
(for example, no distributions may be made if the actual DSCR of the previous
year has not meet a certain threshold). The bank accounts through which cash
flows pass will be pledged and held with a bank within the syndicate; this is
in addition to other provisions to be adapted in the loan agreement.
How
Project Financing Solutions By Subcontracts India Helps
Project Finance is one of the key focus areas for Subcontracts India. We have
access to several project financing groups and institutions that
have institutionalized capabilities to successfully manage the unique and
multidimensional process of project finance transactions led by customized
project structuring approach.
These groups and institutions have been the lead arrangers and
underwriters of a significant amount of project debt over the years. In the
Indian project finance domain, they enjoy a leadership position and
are acknowledged for their comprehensive domain expertise and
knowledge in the infrastructure, manufacturing and mining sectors, having
ensured timely financial closure of several big ticket projects.
Whether you're investing in renewable energy, telecommunications or water
supply and waste water treatment – we develop the right solution for
sustainably viable, flexibly structured financing to meet the needs of your
transaction.
Backed by in-depth expertise you can benefit from our wide network in emerging
and developing countries, our comprehensive knowledge of sectors and
industries, and our 21 locations across North America, Europe, Asia,
Africa, Oceania and Latin America.
How Does One Apply
For Project Finance
Once you have contacted us and shared
your requirement for raising project finance, we will send you our "FINANCIAL
ADVISORY SERVICES TERMS AND CONDITIONS" to
review carefully. If and when you agree to our Terms and Conditions, you will
receive the Client Agreement draft which you will have to fill, sign and return
to us. Subsequently, you will need to submit relevant information
pertaining to your project through our online Project Finance
Application Form.
Our services, however,
do not come for free and hence be prepared to pay our service charges when you
use our services. Also, we are rather choosy about who we serve. We encourage
only serious clients who understand what it takes to arrange finances for
projects. Our seamless services start with our client sending us a formal
Letter of Intent expressing his/her desire to hire our services and then
following this up by entering into a formal service agreement with us and
depositing the token Engagement Fee online prior submitting the Project
Finance Application Form which is non refundable. That is not all. You would
be further liable to pay a Success Fee (case specific) post successful
closure of funding.
What
Happens Next
Our analysts evaluate
projects individually, so if you have more than one project, you should
complete one copy of the form for each project for which you are seeking
funding. Once your Project
Finance Application Form is received by us, our analysts will review the submitted
Business Plan in detail and quickly evaluate whether it is good
enough to move to the next stage.
If our analysts
determine that your project is unlikely to meet our criteria, we will quickly
contact you, usually within a day or two, to inform you the areas of the
Business Plan that needs further working.
However, if our analysts
determine that your project Business Plan is bankable, we will immediately
get in touch with you for further discussions to finalize the project financing
strategy.
Once the above have been
taken care of, we move forward and present your Business Plan to target
investors/financiers.
Important To Note:
1. We quickly respond to all inquiries.
2. We do not delegate executive time to an inquiry until your
project, as expressed in your fully completed Project
Finance Application form, has been
thoroughly evaluated by our analysts.
3. To ensure our executives do not waste time on unrealistic
inquiries we do not enter discussions in any form until we have a full
understanding of your project's potential and risks. We therefore do not offer
meetings, hold telephone discussions or return telephone calls until we have
thoroughly evaluated your project.
4. Please do not send us additional communications during the
application phase as it delays the application process.
5. We do not finance projects valued at less than
$5,000,000.00 (United States Dollars five million), we do not finance
acquisitions and we do not finance projects in countries mentioned in this Restricted
Nations list
6. All our official communications are in English. We do not
offer a translation service.
Upon receipt of all the
documents and information submitted by the applicant, a Funder would evaluate
the project in greater detail. Generally an Appraisal meeting is convened
where all the decision makers at the Funding Company officially review the
project as presented to determine if the project is within their scope of
funding. Subsequent to this meeting, a due diligence of the project is generally
undertaken by the Funder and the Project Sponsors/Applicant pay(s) for the
expenses involved in carrying out the due diligence. Such expenses are project
specific.
Financial Due Diligence
Financial due diligence requires that, during loan preparation and processing,
sufficient analysis is undertaken to enable an informed assessment to be made
with respect to project financial viability and long-term sustainability, and
that the borrowers’ financial and project management systems are, or will be, sufficiently
robust to ensure that funds are used for the purpose intended and that controls
will be in place to support monitoring and supervision of the project.
There are Guidelines that provide the framework for financial due diligence,
namely completion of a financial management assessment (FMA) of the executing
agency (EA) and/or implementing agency (IA), financial evaluation of the
project, and assessment of implementation arrangements (from a financial
perspective, including disbursement and auditing arrangements).
The methodology note provides specific guidance in four primary aspects of
financial due diligence:
1. financial management assessment,
2. project cost estimates and financing plan,
3. financial analysis, and
4. financial evaluation.
It also provides
guidance on assessing disbursement auditing arrangements. This financial due
diligence methodology note offers a suggested approach for operationalizing the
standard project preparation and loan processing requirements of the
Guidelines. the Guidelines, together with the methodology note, should be seen
as a reference guide to assist staff in conducting an appropriate degree of
financial due diligence during project preparation and processing, and
should guide staff in determining the appropriate level of financial
management safeguards required for a given project and/or EA and/or IA.
The advice, directions, and recommendations provided should not be regarded as
a substitute for the professional judgment of SUBCON staff.
Financial
Management Assessment
Effective financial
management within the EA and/or IA is a critical success factor for project
sustainability, both in the effective use of funds and in the safeguard of
assets once created. Irrespective of how well a particular project or program
is designed and implemented, if the EA and/or IA does not have the capacity to
effectively manage its financial resources, the benefits of the project are
unlikely to be sustainable.
The objective of the financial management assessment (FMA) is to ensure that
the EA and/or IA has, or will have, sufficiently strong and robust financial
management systems and procedures in place to ensure sustainability of project
investments and benefits over time.
The FMA is a review of the entity’s systems for financial and management
accounting, reporting, auditing, and internal controls. It also involves an
assessment of the entity’s disbursement and cash flow management arrangements,
and governance and anticorruption measures. The FMA is not an audit; it is a
review designed to determine whether or not the entity’s financial management
arrangements are sufficient for the purposes of project implementation.
Approach and Methodology
The first step is
to determine whether an FMA has recently been completed by any other credible
financial institution (Bank, NBFC, VC or PE agencies) , the objective being to
avoid duplicating diagnostic work that already exists. If an FMA exists, this
should be reviewed and, in particular, any work done to overcome previously
identified weaknesses should be checked. The original FMA can then be updated
accordingly.
While planning to rely on the work of another lender , SUBCONTRACTS INDIA would
thoroughly review the agency’s assessment report to determine whether or not
the results of the FMA are reasonable and can be accepted by SUBCONTRACTS INDIA.
If an FMA has never been completed, or if there have been significant on-ground
changes which render an existing FMA obsolete, then the following approach to
the FMA is recommended:
Review the Economic Sector diagnostic studies specific to the country where the
project is located, including the country financial accountability assessment,
country procurement assessment report, country governance assessment, and
diagnostic study on accounting and auditing.
Early in project preparation, have the borrower/project promoter complete a
Financial Management Assessment Questionnaire (FMAQ).
Review responses to the FMAQ, determine what (if any) additional information is
required in order to be able to conclude whether or not the financial
management arrangements (a) are capable of recording all transactions and
balances, (b) support the preparation of regular and reliable financial
statements, (c) safeguard the entity’s assets, and (d) are subject to audit.
Review past audit reports and audit management letters to assess what concerns
have previously been raised on systems and internal controls.
Form a conclusion with respect to whether or not the financial management
arrangements and financial and project accounting systems can be relied upon
for the purposes of the project.
If issues and/or weaknesses are identified, determine the most appropriate
mitigation measures (e.g., restructuring finance sections, increasing finance
staff, filling vacant posts, developing new systems, developing financial
reporting, training, etc.).
Determine whether, given the findings, it is necessary to include a project
component to strengthen financial management in the EA and/or IA and/or
establish or strengthen a project implementation or project management office
via either technical assistance or consultant support within the project.
Due
Diligence
1. Due Diligence service is rendered by an accredited Due
Diligence service provider appointed by the Funding Partner Company. Due
Diligence is by far the most important exercise in the funding consideration
process.
2. The charges for the Due Diligence are to be borne by the
applicant. These charges are specific for every case and the applicant is given
prior notice of this.
3. It is extremely important that the applicant understands
clearly the processes of Due Diligence is to secure a successful transaction and
mutual business relationship between the applicant and the Funding Partner
Company.
4. The Funding Partner Companies provide finance to viable
projects on precise terms. There are no general terms. Everything is specific
to the project under consideration.
5. Once the Due Diligence is successfully completed, a Funding
Offer is officially made from Funding Partner Company to the applicant (Project
Owner(s)/ Promoter(s)). The Project Owner(s)/Promoter(s) are issued an
Invitation Letter for a table meeting in the Funding Partner Company’s office
which can be in any country. Post a personal interview of the project
owner(s)/promoter(s) ,the MOU is drafted and signed. Insurance requirements too
would be discussed and finalized at this meeting.
Post successful completion of all of the above processes, funding disbursement
would commence within the specified time frame.
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