Equity Bridge Loan Project FinanceBridging equity loan Project financing
also, as banks' equity has been eroded due to loss, the amount of leverage they can sustain has declined; higher prices - fuelled by uncertainties about what the prospects are; low levels of exposure - fuelled by the general economy downswing and fear of recessions; reduction in leverage - banking institutions - fearing that the banking sector will be unable to meet the challenges of the global financial system; and low levels of leverage - the ability to leverage their financial resources to meet the needs of the euro.
Much of this trend is held back by prevailing economic activity, state investments and the centralisation of banking systems, which put pressures on corporate creditors to sustain credit to local consumer and small businesses at the detriment of either global or project credit. This is a set of standards that oblige the obligor to reimburse the creditor if the creditor's refinancing costs are higher than the inter-bank benchmark interest rates (e.g. LIBOR) normally used to present these costs.
In September/October last year there were reported cases that the LIBOR markets were no longer functioning; display sets were no longer seen as an exact measurement of what bankers had to foot for borrowing on the inter-bank markets. As a result, in some cases interruption provisions were used. However, so far these fears appear to be relatively short-lived, simply because of the enormous amount of cash that has been pumped into the system by CBs to boost the markets and their impact on financing costs.
There are also a number of additional elements that may have discouraged prospective claimants, including: a significant percentage of creditors must be affected in order to activate the provision (typically 30 per cent or 50 per cent percent of aggregate commitments); creditors who belong to the panels that provide the information used to determine the benchmark interest rates if they rely on the provision; possible negative trade-offs if a creditor acknowledges that its financing costs are higher than the benchmark interest rates.
Borrower should be aware that all safeguards they have are based on the assumption that the benchmark interest rates apply and therefore do not react if a disturbance of the markets is claimed. Given the need for creditors to reassess the risks associated with their asset values, it seems unavoidable that risks weights will rise with regard to equity standards, that extra funding will have to be provided and that the lender's yield on a particular credit line will be reduced.
As a rule, creditors are only entitled to charge higher charges of this kind to the debtor under the terms of franchise agreement if they are the result of an amendment to a statute or ordinance (and not of the implementation of an act or ordinance). Some institutions may have more complicated legal arrangements for sharing the risks of higher charges - for example, the creditor may have reserved the right to charge higher charges related to a worsening of the borrower's creditworthiness.
It is likely in these cases that the borrower will be faced with a right to higher cost. Loan crises affect all companies in the value added chains and carry the potential risks of failure of various project companies' partners (including financials such as GICs and loan backers as well as the project company's own suppliers and customers).
In these cases, there is a failure of the credit contract, which provides the creditors with a number of privileges and penalties, also with regard to the credit line's prospects. Although no particular defaults can be identified, creditors will find that special consideration is given by creditors when auditing annual accounts and when auditing and authorising periodical cash flow forecasts to determine funding levels.
It is inevitable that the estimates used for these forecasts will be more conservative than those used previously. It may also authorise creditors to require an intermediate estimate or a check on reservation needs or to request information. The Mandated Lead Arranger (MLA) function in a liquidity driven environment is assigned to a small number of institutions (typically one or two) that commit to underwriting the entire credit line and are likely to take out a large portion of the final closing of the syndication.
A less fluid environment makes it harder to syndicate and makes bankers less satisfied with large technical liabilities. Now, in an elliptical environment like this, the standard is the closed game. In addition, the more elliptical the markets, (i) the lower the amount each member of the CL is willing to take and retain, and the greater the number of necessary bankers, and (ii) the less willing each banking institution is to undertake to accept and retain a certain amount before it reaches full-funding.
This includes (i) the challenges of closing a deal with a large group of lenders and (ii) the possible destruction of value by applying the smallest single denominator across the financial conditions - this can lead to a new dynamic, such as the situations where lenders are actually required to agree to the stance of a banking institution operating on adverse conditions but whose demands cannot be denied as there is no over-subscription in the group.
Especially for large scale ventures, the initial stage of the sponsorship is challenging to find skilled and dedicated donors who are not willing to assume debts, but will work as advisors to the syndicate to find a viable and affordable way forward. Donors operating in this role can be expected to be remunerated for their early involvement, both in financial and financial respects, in order to obtain a right of compliance with the ultimately chosen financing conditions and possibly a favorable proportion of the project's interest in the switches, other collateral operations of the lending activity (by being appointed Kontobank ) or extra charges (by being appointed Dokumentationsbank, Versicherungsbank etc.).
Simultaneously, the donor choice procedure must maintain a degree of openness and assurance of engagement, due care and price setting that allows each principal and sponsor to be happy in value for price, affordable and deliverable. Within structured credit lines, the price structure and structure of the credit line allow for price and condition changes after the signing of a formal undertaking, to the degree required by the Syndication processes.
A similar dynamics in closed clubs that can be described as "extended markt flex" rules in which prices and rates can be adjusted due to predominant weather or the reaction of a member of the clubs to the sub-prime mortgage situation. If this happens in a situation where the syndicate has been chosen on a competitively -based approach, it can lead to problems, in particular because, in particular, significant and delayed changes by the creditor to the project company's bidding requirements can disrupt the assessment base and thus interfere with the choice made.
A similar issue arises with regard to the conditions of a tender guarantee that a syndicate tendering for a project must offer as a precondition for its nomination as Preferential Tenderer. The Sponsor must at least make sure that the Reverse Debt cannot be drawn if, due to an increased price of its financing, it is not able to supply the prices in its Offer.
The tenor for project finance of 25-27 years - typically until the first half of 2008 - is now generally considered to be much less available. Indications are that, in parallel with the general decline in the indebtedness of project finance over the last six month, there are many project finance financiers who now favour or strongly advocate a tendency towards much tighter maturities (e.g. 7-12 years).
From our point of views, the project finance markets are currently in a state of change with regard to this topic. Those arrangements may contain various characteristics to reduce the exposure to the possibility that the obligor may not be able to obtain funding by the due date, such as: a reverse amortization cycle to a targeted funding date one year (for example) prior to the due date.
As a result, an extra convenience level is created in the borrower's return compared to the coverage levels, which assists withinancing. This also contributes to the borrower's being able to fund itself within the same coverage level and debt parameter as the initial facilities, even if the funding costs have increased; a system for tracking and controlling the funding process.
It is also likely that there will be penalties if the loan has not been paid back by the targeted funding date, such as a full credit check to repay the loan and an increased spread to create incentives for timely funding and reduce debt to the extent that project revenues allow. The " hard mini-perm " is a variation that offers incentives for early funding without explicitly giving up longer-term maturities.
The Miniperm structure represents equity with very important problems in relation to IRR projections, which can have a significant influence on the available financing resources for equity, the equity costs and the total project outlay. It is the aim of the sponsor to prolong the duration or to fund it in the longer run as soon as prevailing commercial circumstances permit.
If the project is acquired on a public-private partnership base with a government client, the project entity may attempt to pass on all or part of the refunding risks to the client/officer. As an alternative, an assumption of an increase in the spread after the targeted re-financing date could be factored into the periodical payment from the start.
Whenever a third person declares that it is willing to bear or divide the burdens of higher funding charges for funding, it is likely that a compilation of other questions will arise, such as if and to what degree a funding profit needs to be allocated; whether payment by the third parties to reduce the funding risks can be recovered; whether the third parties have full power of scrutiny over the funding decisions and their condition ality; whether the third parties should have the possibility to request the re-tendering of other components of the project at the moment of any future funding, either to make the project more eligible or to achieve economies of scale.
Profits have risen sharply, but at least for the moment this has been particularly compensated by lower interest rate spreads. A further very noticeable shift in the markets over the last six-month period has been a significant decrease in lenders' willingness to take risks in comparison with their traditional positions prior to 2008. First, in our past practice, creditors require a higher degree of due diligence in order to write back the letter of endorsement often requested by procurers; third, an added emphasis on credit risks necessarily leads to more downward gloom in terms of sensitivities, so that extra room for manoeuvre is added in terms of funding ratios requirement, lower leverage is required, and returns on equity are further slashed.
On the other hand, it is still to be seen whether the seeming trend towards tighter maturities will make creditors less willing to address longer-term project exposures; we believe that short-term creditors will continue to be interested in allocating and reducing longer-term exposures as it is likely to be crucial to address these topics from the start in such a way that the project becomes more resilient to mitigate funding exposure.
Indications are that the lender's thirst for equity bridge loan arrangements is diminishing. This is also directly related to the return on equity, and if it turns out that no or only unattractive bridging equity credits are available, carefully consider how best to organise (and remunerate) the equity capital injections previously made than would have been assumed in the original project planning.
Given that the elements affecting the liquidity and price of banks' traditional project finance are likely to persist for some considerable period of now, it is certain that there will be changes in the source of finance for project finance. Expected trends include: greater engagement of multi-lateral intermediaries, ECAs and DFIs; greater use of Islam finance; new schemes for attracting investment in investment in projects among institutionals; the downgrading of a number of specialised PE fonds and asset sales by specialised providers, resulting in new PE fonds coming into the industry; reduced monoline ownership; low interest by large corporations; large corporations and commodities dealers contributing to the finance of their counterparts.
However, it is clear that most of these trends would have a significant impact on the procurement and project finance structure processes and conditions.