Comparison of project financing and traditional financing: advantages and characteristics of project financing

Comparison of project financing and traditional financing: advantages and characteristics of project financing

Project financing is a means of financing emerging in recent years, is the name of the project to raise funds for more than one year, with the project operating income to bear the responsibility for debt repayment of the form of financing. Below I bring the comparison of project financing and traditional financing: the advantages and characteristics of project financing.

Project financing is a means of financing that has emerged in recent years, is to raise funds in the name of the project for a period of more than one year, with the project operating income to assume responsibility for debt repayment of the form of financing. What are its advantages and characteristics?

Project financing refers to the lender to a specific project to provide loan agreement financing, for the cash flow generated by the project has the right to repayment of debt claims, and the project's assets as collateral security type of financing. It is a type of financing in which the future revenues and assets of the project are used as a source of funds and security for repayment of the loan.

Project financing is fundamentally different from traditional financing.

1, the object of the loan is different. The project financing object is the project company, the lender is based on the project company's asset status and the project completed and put into operation after the creation of the economic returns as the principle of loan issuance considerations; and the traditional financing object is the project sponsor, the lender in deciding whether to invest in the company or for the company to provide loans based on the company's current credibility and asset status as well as the unit concerned. The company's creditworthiness and asset status and the guarantee provided by the relevant organizations.

2, different financing channels. Project financing, the construction funds needed for the project has a large size, long term characteristics, and thus the need for diversified fund-raising channels; and traditional financing, engineering projects are generally small, short-term, so generally a single funding channel.

3, the nature of recourse is different. Project financing is characterized by limited recourse or non-recourse financing; and traditional financing, the bank provides funds with full recourse. Once the borrower is unable to repay the bank loan, the bank will exercise the right to dispose of its borrower's assets to make up for the loss of principal and interest on its loan.

4, different sources of repayment. Project financing funds to repay the project after the commissioning of the proceeds of the project and the project's own assets as a source of repayment; traditional financing, as a source of repayment of all the assets of the project sponsor and its proceeds.

5, the security structure is different. Project financing generally requires a rigorous and complex structure of the guarantee system, which requires that the project has an interest in a large number of units of debt funds may be the risk of guarantee; traditional financing, the guarantee structure is generally relatively single, such as mortgages, pledges or guarantees of loans and so on.

Characteristics of project financing:

1, the exclusivity of the financing subject

The exclusivity of the financing subject determines the creditor's concern is the project's future cash flow can be used to pay back how much of its financing, the amount of financing, the cost structure and so on, and the project's future cash flow and the value of the assets are closely related.

2, limited recourse

Project financing is the project on the project, the creditor in addition to the contracting party and the other special agreement, can not recourse to any form of assets other than the project itself, that is to say, project financing is entirely dependent on the future economic strength of the project.

3, the dispersion of project risk

Because of the exclusivity of the financing subject, the limited recourse, decided as a project contracting parties to the various risk factors and benefits of the full argument. Determine the maximum risk borne by the participants of all parties and the possibility of cooperation, the use of all the advantages of the conditions, the design of the most favorable financing scheme.

4, the diversity of the project credit

Diversified credit support will be allocated to the project's various future risk points, so as to avoid and resolve uncertain project risks.

5, the complexity of the project financing process

Project financing is large, long and extensive, covering the overall design of the financing program and the operation of the various aspects, the need for legal documents are also more, the financing process is more complex than traditional financing.

Advantages of project financing:

1. The limited recourse clause ensures that the project investor will not have a crisis in the other properties of the investor when the project fails.

2, in the national and government construction projects, for the "good" large-scale construction projects, the government can through a variety of flexible financing methods to deal with the possible negative impact of debt on the government budget.

3, for multinational corporations to carry out overseas joint venture investment projects, especially for enterprises that do not have operational control or invest in countries or regions with higher risks, can effectively separate the company's other businesses from the project risk implementation, thus limiting the project risk or country risk.

4, project financing as a new financing method, for large-scale construction projects, especially infrastructure and energy, transportation and other capital-intensive projects have greater attraction and operating space.

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Introduction to Project Finance

Connotation

In a broad sense, all the financing activities carried out for the construction of a new project or the acquisition of an existing project, or the restructuring of the debt of an existing project can be called project finance. In a narrow sense, project finance (Project Finance) refers to a non-recourse or limited recourse financing or lending activity secured by the [url]assets[/url], expected returns or interests in the project. We generally refer to project finance only in the narrow sense of the concept.

Project financing began in the 1930s in the U.S. oil field development projects, and then gradually expand the scope, widely used in oil, natural gas, coal, copper, aluminum and other mineral resources development, such as the world's largest, with an annual production capacity of 800,000 tons of copper in the Chilean Escondida Copper Mines, is to achieve the development of the development of the project financing. Project financing, as an important financing method for international large-scale mining development projects, is financed by the good business condition of the project itself and the cash flow after the project is completed and put into use as the repayment guarantee. It does not need the credit or tangible assets of the investor as a guarantee, nor does it need the repayment commitment of the government department, and the object of loan issuance is the project company established specifically for project financing and operation. How to finance the necessary capital is crucial to the birth or development of any business. For Chinese enterprises or business operators, there are two problems, one is the lack of understanding of effective financing methods; the second is the face of numerous financing methods, do not know how to choose and how to start, especially in the view of some small and medium-sized enterprises and entrepreneurs, financing is only the exclusive right of large enterprises. As a result, there is no shortage of companies in our business community that have lost out on development opportunities due to funding and other issues.

Kinds

I. Non-recourse project financing

Non-recourse (No-recourse) project financing

Non-recourse project financing is also known as pure project financing, in which the repayment of the loan relies solely on the operational efficiency of the project. At the same time, the lending bank in order to protect its own interests must be obtained from the project has the assets of the security of the property rights. If the project fails to be completed or fails to operate for any reason, and its assets or earnings are insufficient to pay off the entire loan, the lending bank has no right of recourse against the sponsor of the project.

Non-recourse project financing has the following characteristics in terms of operational rules:

1, the project lender does not have any claim on the project sponsor's other project assets, and can only rely on the cash flow repayment of the project;

2, the project sponsor's ability to utilize the cash flow generated by the project is the credit basis of the project financing;

3, when the When the allocation of project risks is not acceptable to the project lenders, a credit guarantee by a third party will be necessary;

4. The project financing is generally based on a predictable political and legal environment and a stable market environment.

Second, the financing of limited-recourse projects

Financing of limited-recourse (Limited-recourse) projects

In addition to using the operating income of the loan project as the source of repayment and obtaining a security in rem, the lending bank also requires that there be a third-party guarantor other than the project entity. The lending bank has the right of recourse against the third party guarantor. However, the liability of the guarantors to assume the debt is limited to the amount of security provided by each of them, so it is called project financing with limited recourse.

The limited recourse nature of project financing is manifested in three aspects:

1. The `limited nature of time.

That is, generally in the construction and development phase of the project, the lender has the right to full recourse to the project sponsor, and through the "commercial completion" standard test, the project enters into the normal operation phase, the loan may become non-recourse.

2. Limited amount.

If the project fails to generate sufficient cash flow during the operational phase, the difference can be recovered from the project sponsor.

3, the limited nature of the object

Lenders can generally only be recourse to the project entity.

Difference between project financing and traditional financing

Project financing and traditional corporate financing are mainly different in the following ways:

1, the main body of financing and repayment basis is different from the main body of the project financing is the project company, the project company is not relying on the project initiator's credit and assets, but rather on the project itself, the future cash flow and asset status as the debt and loan repayment. Asset status as the basis for debt and loan repayment. The main body of traditional corporate finance is the project sponsor, and its financing and loan repayment is based on its own asset status, creditworthiness, and the guarantee provided by the relevant units for it.

2, the nature of the financing recourse is different from the traditional corporate finance, the lender provides funds with full recourse. Project financing, the lender's loan recovery depends mainly on the economic strength of the project, the lender can not be recourse to the project borrower in addition to the project's assets, cash flow, and the obligations assumed by any form of property.

3, the risk dispersion ability is different from traditional corporate finance, because the financing risk is borne entirely by the project sponsor, project financing has a higher risk dispersion ability due to the risk sharing of the project participants.

4, balance sheet records are different from traditional corporate finance, a variety of debts and liabilities need to be directly recorded in the balance sheet of the project sponsor, the project financing method has a debt shielding function.

What are the characteristics of project financing and traditional financing methods

Project financing and traditional financing methods compared.

1, the exclusivity of the financing subject. Project financing mainly relies on the project's own future cash flow and the formation of assets, rather than relying on the creditworthiness of the project's investors or sponsors and assets other than the project itself to arrange financing. The exclusivity of the financing subject determines that the creditor is concerned about how much of the project's future cash flow can be used for repayment, and its financing amount, cost structure, etc. are closely related to the project's future cash flow and asset value.

2, the limited recourse traditional financing, creditors are concerned about the investment prospects of the project at the same time, more concerned about the creditworthiness of the project borrower and the reality of the assets, and project financing, as mentioned above, can not be recourse to any form of assets other than the project itself, that is to say, the project financing is entirely dependent on the future economic strength of the project. Because of the exclusivity of the financing subject, the limited nature of recourse, determines as the project contracting parties to the various risk factors and benefits of the full justification. Determine the maximum risk borne by the participants of all parties and the possibility of cooperation to design the most favorable financing program.

4, the diversity of the project credit will be diversified credit support allocated to the project's future risk points, the buyer signed a long-term purchase contract (agreement)

5, the complexity of the project financing procedures project financing large amounts, long time frame, involving a wide range of aspects, covering the overall design of the financing program and the operation of the various aspects of the financing process is more complex than traditional financing. And upfront costs account for the proportion of the total amount of financing and project size is inversely proportional to the financing interest is higher than the company loan.

Financing Structure: Extended Information Common forms of financing:

1, bank loans Banks are the most important financing channels for enterprises. It is divided into three categories: working capital loans, fixed asset loans and special loans. Specialized loans usually have a specific purpose, its loan interest rates are generally more favorable, the loan is divided into credit loans, guaranteed loans and bill discounting.

2, stock financing stock has a permanent, no pressure to pay interest and other characteristics, the stock market can promote the conversion of the business mechanism, really become self-management, self-supporting, self-development, self-restraint of the legal entity and the main body of market competition. The stock market provides a broad stage for asset reorganization, 3, bond financing corporate bonds.

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