Is the borrower required to have equity in the deal ?
Many borrowers often expect investors to take all the risks in the project financing deal.
Because project financing is done through the Special Purpose Entity that has never traded, both borrower and investor need to make contribution.
Yes. We require actual cash equity in the deal. All project finance lenders, project finance arrangers and project finance providers require the borrower to have equity in the deal. We have never funded a project financing with less than 10% equity, and then only once in the last decade. The average project financing last year closed with 63% debt and 37% sponsor equity.
Project finance is not speculation. It was developed more than 700 years ago as a method of financing that is specifically intended to mitigate or eliminate risk. In fact, almost every element and procedure in project finance are for risk mitigation. For every project finance transaction closed there are more than 20 applications because project finance lenders are extremely careful about taking risk. Deals with no equity don’t get funded and deals with very little equity stand very little chance.
Is the USE of the ESCROW safe when using Cash Deposit ?
Many project owners and sponsors prefer to use Cash In Escrow as collateral during the drawdown period.
Balance sheet depth, NO financial statements, Bad credit, often prevent many projects from being bankable and fundable.
YES, it is. After the DD is completed, and the signing of the project finance agreements. The project developer will then be required to establish an ESCROW account. The amount that is deposited is returned back after the final drawdown is completed or when the project reaches Commercial Operations Date (COD) - whichever comes first. Escrow funds generally will earn interest for the depositor. ESCROW TRUST accounts may be held not only by the attorneys, but also by the top-tier banks, or top international accounting and auditing firms. There are applicable laws and Licensing requirements to be considered. The agreed drawdowns are initiated only after the confirmation and the verification of the ESCROW account. The details of the use and non-use are part of the discussions during the due diligence process.
We advise all project owners, and developers to view our videos on this subject and talk to one of our investment officers.
When does the due diligence occur ?
Due diligence is the process that is undertaken by both the borrower and =the financier.
It is done to establish the suitability of the relationship if both parties are happy with their conditions, the envisaged relationship, and whatever aspects of the deal.
After we submit a project finance loan request or document package to one of our financial partners, jointly we perform a preliminary due diligence investigation. It’s not the comprehensive due diligence that will be required if the deal continues forward, the preliminary and comprehensive due diligence investigation intended to uncover any sponsor or project deficiencies that would hinder the closing of the project financing.
We will verify the sponsor’s reputation, financial strength, and relevant experience. We will verify the quality and sufficiency of the project documents (at least those that have been prepared to date), and we will analyse the project and property at about the same time as our site visit. Our Preliminary Due Diligence Report will be completed after the site visit and provided to the lenders with the loan application and project finance documents.