Finance
Financing methods and structures for construction projects will vary depending on a number of factors, including the type and value of asset being constructed, the applicable procurement arrangement and transaction structure, whether the project is being procured for the public sector or by a utility, and the applicable regulatory environment.
Project finance For complex, capital-intensive and long-term infrastructure projects (including private finance or PPP projects – see Public Private Partnerships below), project finance may be used. The key feature of a project financing is that it involves the provision of third party debt finance on a limited recourse basis, advanced to a special purpose borrower, meaning that lenders will generally only have recourse to the assets of the project and not to the shareholders or to assets outside the project. In order for project financing to be viable, the revenue generated from the assets constructed, once operational, must be sufficient to pay the costs and expenses of operating and maintaining the project, to repay the lenders, and to provide a return to the project company and its investors. The level of equity to be contributed by the sponsors of a project will depend on the nature of the project and requirements of the lenders. Sources of debt Debt finance is provided by a variety of sources, including commercial banks, international financial institutions (such as the European Investment Bank (EIB)), institutional investors (pension funds and life insurers) and infrastructure funds.
Historically, commercial banks have been the largest source of project finance debt, but liquidity constraints following the financial crisis, together with the long term impact of regulation on commercial lenders’ cost of long term funds, have reshaped the lending environment, resulting in increasing diversity of providers and capital structures. Investors and financiers may also provide subordinated debt directly or through funds, which may themselves have complex debt and equity capital structures. Depending on the size of the project, finance may be provided by a single lender, or a group of lenders put together for the purpose of the specific deal (a club deal), or through The issuance of listed bonds has also been used to finance large scale projects, although the use of this technique was adversely affected by the demise of many monoline insurers following the credit crisis. More recently, alternative credit enhancement structures such as EIB’s Europe 2020 Bond Initiative have been used to achieve the higher investment grade credit ratings typically required to access the long term bond market. formal syndication. Capital markets
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