Long-Term Project Finance: All You Need To Know | Resurgent India

Long-term funding/financing for industrial and infrastructure projects based on a non-recourse financial structure is referred to as Long Term Project Finance. The structure often includes a syndicate of lending institutions and multiple equity investors as sponsors. Due to the capital-intensive, high-risk, and time-consuming (long gestation period) nature of such projects, independent projects of a corporation necessitate the finesse of Project Finance approaches. In such circumstances, capital is injected through the Project Finance model based on the projected cash flow from the project, with most of the project assets and cash flows maintained securely. Since it allows firms to fund huge projects off-balance-sheet, project finance appeals to the private sector (OBS).














Sponsors in project finance


Each project sponsor has a distinct aim for investing in the project finance venture, which may differ depending on the sponsor type.  In such deals, four categories of sponsors are typically involved:

 

  • Industrial sponsors, who are often associated with a downstream or upstream organization, are an important part of project finance. Examples: The Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI)
  • Public sponsors, for example, include national and local governments, municipalities, and municipalized businesses concerned with social welfare, etc.
  • Contractors/sponsors - Companies that design, build, or run large plants and are interested in participating in the project by providing stock or subordinated financing for the project.
  • Financial sponsors/investors – Firms that participate in a project finance initiative with the explicit goal of investing funds in high-profit transactions. Example: SBICAP.

Key features of project financing

  • Non-Recourse Financing: Long Term Project finance is generally a non-recourse loan owed to both individual shareholders and project sponsors. In the event of a default, neither the borrower nor the borrower's shareholders hold any liability.
  • Risk allocation: Project financing deals are typically riskier than traditional corporate finance transactions. Due to the increased risk exposure, apportioning the risk in the contract is usually crucial for long-term project finance loan approval. The risk allocation process, which is carried out in the project documents, aims to match risks and associated returns to the parties involved in the transaction who are most suited to handle them.
  • Multiple Participants: Another characteristic of project financings is that they always involve a large number of project participants. Given the large sums involved in project financings, project sponsors are often required to include equity investors on the list of project stakeholders.
  • Off-Balance-Sheet: The off-balance-sheet aspect of project financing appeals to both project sponsors and participants since project loans do not add debt to project sponsors' balance sheets and have no influence on their available borrowing capacity. The off-balance-sheet characteristic of project finance is especially appealing to government organizations because project debt and obligations do not affect their balance sheets, reducing pressure on an increasingly stressed fiscal setting.

Top Project Finance Company in India

Resurgent India Ltd, a SEBI registered Category-I Merchant Banker, is a top-of-the-line firm that provides project finance services in India. It has a talent pool of experienced professionals and its in-depth understanding of the nooks and corners of the market speed up the project funding process.

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