Project finance is an extremely useful tool for injecting capital into large investment projects, where the cash flows generated by the project itself can be used for its implementation and for repaying the debt resource.
One of the features of project finance is that the Solar PV is transferred to a legal entity created specifically for a PV project (Special Purpose Vehicle, SPV). Interest payments and debt repayments under this financing model are made exclusively from the current cash flows of the investment project. Assets related to the project serve as collateral.
This structure, with the Project being separated into a separate company, has a number of advantages related to financing without guarantees, as well as a facilitated process in the event of a future sale of the Project.
Unlike traditional investment financing of an established business, with project financing it is difficult to verify the feasibility of building a future facility and therefore requires careful analysis. Here, we do not have information on the previous asset situation, including financial history with profitability and liquidity, which is usually key to assess the creditworthiness of the company. Therefore, the analytical data and expert predictions of the likelihood of success of a PV project obtained during the analysis process are critical to the approval of financing.
Despite the uncertainty, research shows that project finance is associated with less risk than traditional corporate loans. Among the reasons for this, experts call the close monitoring by investors and managers, as well as clearer structuring of financing.
In general, three important aspects of project finance can be identified, namely the focus on cash flows, the allocation of risks between project partners and the principles of non-recourse financing:
- Cash flow is key in determining the amount and structure of financing. The cash flow from a PV project, net of taxes, indicates the amount of free financial resources a company can use in the future, for example to pay off debts. Stability and sufficiency of cash flow are important indicators for any investment project. Based on the free cash flows and the debt service coverage ratio set by the lender, the debt repayment capacity of the project is determined and the repayments are set accordingly, which fully follow the seasonality of the cash flows.
- Non-Recourse Financing – Due to its legal capacity and creditworthiness, the project company (SPV) can act independently as a borrower. In this way, project loans are shown as liabilities on the SPV’s balance sheet, and the project investors’ balance sheet is unencumbered by borrowed funds. The advantage of this structure is that the high proportion of committed capital in the project company will not affect the balance sheet of the sponsors. This allows the implementation of large-scale projects that would otherwise disrupt the financial stability of individual participants.
- Risk sharing between partners – an important feature of project finance is the principle of risk sharing. In the context of traditional corporate finance, creditors have unfettered access to a company’s assets. Depending on the legal form, equity investors are liable for corporate liabilities with the capital invested or additionally with their personal assets. Project financing uses a different principle. Such projects are usually characterized by large amounts of investment. Most of the capital requirements are financed by external capital. The highly specific assets of the solar project and the projected cash flow are not a sufficient guarantee for lenders. For these reasons, risks are distributed flexibly among the project participants.
- Risk allocation is based on the ability of the participants to influence and control certain situations in the best possible way. Ultimately, the risk must be borne by the country that, because of certain professional competencies, experience, resources, technology, can best cope with it. This creates an incentive for the development of the project and helps it to achieve sustainable success. Lenders may also assume certain risks by limiting their right to receive interest or principal on the loan when due under certain conditions and by providing additional funds if necessary.
The allocation of risk takes place at the contract development stage, whereby responsibility and risks during planning, construction and operation are assigned to specific participants. During planning, financial partners take the greatest risk. At this stage, professional experience and knowledge of the legal and financial aspects of solar energy projects are critical to future success.
- In the case of solar project finance, due to the fact that the financing is structured without additional guarantees and based entirely on the cash flow of the Project, lenders add a number of conditions and requirements to minimize risk. These requirements typically include selection of the highest quality technology (Tier 1 PV modules and inverters), approval of the selected contractor to build the plant, an insurance package covering a range of risks, performance guarantees from the company maintaining the plant, set aside funds in reserve accounts, and more.
Despite a number of constraints associated with project finance, we believe that this instrument is highly suitable for the construction of large-scale PV projects and, in combination with resources attracted from a venture capital fund or the investor’s own funds, significantly improves the return on the project.
What is our added value in the process?
Negotiating funding is perhaps the most flexible stage of the whole investment process. The result may take the project to additional passive income with maximum return or, in the opposite case, burden the investor’s current business as a result of an unrefined risk analysis and subsequent ineffective terms negotiated with the financing company. Our project finance services for PV power plants are not limited to financial modelling and professional advice.
xFigureFinance is an independent financial advisor with a combined team experience of over 30 years. We know the renewable energy sector, the opportunities for raising capital and we are able to negotiate the best financing for the developing of solar power plants.
We are a trusted partner from Idea to Financial Success.