Large-scale projects within the government and corporate sectors require large amounts of money. An organisation might not have the funds to initiate a large-scale project. In such a case, project finance is the right choice for the organisation to raise funds.
However, investors will offer funds only when the project is associated with higher cash flows in the future. Organisations might seek project finance support from investment banks to fund large-scale projects. Project finance support for IB (Investment Banking) is also available in today’s scenario. Read on to understand the best practices for project finance support in investment banking.
Are you familiar with project finance?
Project finance is a special type of funding suited for large-scale projects. Infrastructural projects are usually completed with the help of project financing. For a capital-intensive project, it helps secure loans from investors. The loan repayment is completed with the help of cash flows generated by the specific project upon completion. Investors determine the risks associated with the project via its cash flows.
If a project is not expected to generate profits after completion, investors might not consider it. When lenders feel the cash flows generated by the project are enough to repay the debt, they indulge in project financing. You can say that the creditworthiness of a project must be known before sanctioning loans.
Project finance is a secure means of funding for investors. The project’s cash flows or equipment are kept as collateral in project financing. For example, an infrastructure might be used as collateral in project financing. Project financing is usually structured as a recourse loan, where the lender can seize assets or cash flows on non-repayment of debt.
Some organisations might prefer non-recourse loans, where they cannot be pursued for payment after the seizure of collateral. There is a misconception that only government entities rely on project financing to collect funds. Of course, government entities collect funds for large-scale projects like flyovers, hospitals, bridges, metro, and transit points. However, the project financing method is not only limited to government entities.
Besides government entities, private organisations depend on project financing to fulfil their capital needs. For example, a corporation might require funding to open a thermal power plant in a new location. It can seek recourse or non-recourse loans from investors. The debt repayment will be completed with the help of profits generated by the functional thermal power plant.
Understanding the Role of investment banks in project financing
Investment banks play a major role in project financing. They partner with organisations and help them secure funds for high-value projects. Since investment banks have a team of financial experts, they help organisations to prepare project requirements, predict cash flows, and attract investors. Project finance support for IB can help them secure funds for capital-intensive works. Here are some roles of responsibilities of investment banks for project finance:
Investment banks help organisations with the financial structuring of a project. It involves determining the debt and equity required for the particular project. It also includes the profitability of the project to repay the debt.
Investment banks can connect organisations and investors for project financing. They can connect with the top investors known for investing in similar kinds of project finance deals.
Investment banks can conduct due diligence to identify the risks and opportunities associated with a project. When an organisation fails to repay the debt via cash flows, the completed project might be acquired by the investor(s). For the same rationale, it is essential to consider the risks associated with the capital-intensive project.
Investment banks lend advisory services throughout the lifecycle of high-value projects, from financing to repayment.
Understanding the best practices for project finance support
Here are some effective practices for project finance support for IB:
Conduct detailed due diligence to uncover the vulnerabilities of a project. These vulnerabilities might prevent the project from generating ample cash flows after completion.
Investment banks must use effective financial models to determine a project’s creditworthiness, profitability, and cash flow. These financial models can also help investment banks make assumptions or predictions.
Market intelligence is essential for successful project financing in today’s scenario. Stay updated with investor demands, market trends, and economic changes to find the best deals.
Investment banks must motivate clients to seek funds for ESG-focused projects. ESG-focused projects are likely to get better deals from investors in today’s era of green and sustainable financing.
Investment banks can also look for third-party support for project financing processes. Project finance support for IB can help reduce the turnaround time for different processes.
In a nutshell
Project financing can help organisations fund capital-intensive initiatives. Project finance support is available for corporations and investment banks looking to generate capital for themselves or their clients. However, project financing will be a success only when you follow the best practices. Learn more about the best project finance support practices!